Does Hedge Accounting Under SFAS 133 Increase the Information Content of Earnings: Evidence From the U.S. Oil and Gas Industry

• Published date: 01 July 2016
• Date: 01 July 2016
• Author: Nancy L. Beneda
• DOI: http://doi.org/10.1002/jcaf.22174

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© 2016 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.22174

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Does Hedge Accounting Under

SFAS 133 Increase the Information

Content of Earnings: Evidence

From the U.S. Oil and Gas Industry

Nancy L. Beneda

INTRODUCTION

The current

study hypothesizes

that firms which use

hedge accounting,

under Statement of

Financial Account-

ing Standard (SFAS)

1331 and Interna-

tional Accounting

Standard (IAS) 39,2

should have more

information about

firm performance

in their reported

earnings than other

firms. The information content

of earnings for firms that use

hedge accounting is expected

to be higher for two reasons.

First, firms that use hedge

accounting, under SFAS 133,

are expected to have lower

earnings volatility,3 which is

expected to reduce informa-

tion asymmetries in earn-

ings.4 Barth, Elliott, and Finn

(1999) document that firms are

rewarded in the stock market

for having earnings that con-

stantly increase. The results of

Barry and Brown (1985); Bar-

ron, Kile, and O’Keefe (1999);

and Dichev and Tang (2009)

suggest that investors can more

accurately assess the value of

growth opportunities from

smoother earnings.

Second the

increased transpar-

ency about effective

hedging, under SFAS

133, for firms that

use hedge accounting

should reduce infor-

mation asymmetry

and result in a closer

association between

effective hedging and

firm value (Lang &

Lundholm, 1996;

Van Ness, Van

Ness, & Warr, 2001).

Firms that use hedge

accounting, under

SFAS 133, have comprehensive

disclosure requirements regard-

ing the purpose of derivative

use and the effectiveness of the

hedge, increasing the transpar-

ency about a firm’s risk, risk

management strategy, and

hedging effectiveness.5

In contrast with firms that

use hedge accounting, firms

that choose to use derivatives

This article examines the information content of

reported earnings for a sample of U.S. oil and gas

firms that use hedge accounting, under Statement

of Financial Accounting Standards (SFAS) 133 and

International Accounting Standard (IAS) 39. The

study finds that for firms that use hedge account-

ing, earnings are more informative about firm

value and risk exposure than firms that do not use

hedge accounting. The study also finds that firms

that use hedge accounting and are effectively

using derivatives have higher firm value than other

firms in the study sample. © 2016 Wiley Periodicals, Inc.

Refereed (Double-Blind

Peer Reviewed)