The Informativeness of Derivatives Use: Evidence from Corporate Disclosure through Public Announcements

Abstract

We provide new evidence on the role of private information in determining corporate derivatives use by studying how markets respond to announcements of changes in derivatives positions by gold-mining firms. Announcements of increases or decreases in derivatives positions cause, respectively, negative or positive reactions in equity prices for both the announcing firm and other gold-mining firms, and, respectively, negative or positive reactions in the gold market. The gold market and stock market reactions (both firm and industry) are significantly more positive or negative, respectively, when firms explicitly state that they are decreasing or increasing derivatives positions due to a change in their market view of future gold prices. By examining dynamic risk management in an asymmetric information setting, our study also provides new insights into (a) the relation between hedging policy and the value of the firm, and (b) the practice of selective hedging.