Abstract
This paper examines the consequences of FASB Statement No. 133 for extensive users of derivatives. Specifically, it examines: (1) The consequences of the new hedge- effectiveness criteria and altered reporting requirements as it relates to the earnings and cash flow volatility. (2) The effects of the regulation on analysts’ earnings forecast quality; (3) Market’s response to new information on hedge-effectiveness of firm’s derivatives portfolios, provided as a consequence of this regulation. Results are consistent with increase in earnings volatility of substantial derivative-users. Evidence is weaker for a similar break in cashflow volatility series. It is found that analyst forecasts error did not increase significantly for derivative-users and market incorporated the new information on hedge (in)effectiveness of firm’s derivative portfolios in earnings expectations.
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