An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Haiwen (Helen) Zhang
University of Minnesota

Abstract: This paper examines whether SFAS 133 effected a change in corporate risk-management behavior. I hypothesize that the effect of the standard on firms' risk-management activities varies depending on the hedging effectiveness of the derivative instruments. I designate a new derivative user as an effective hedger if its risk exposures decreased after the initiation of the derivatives program and as an ineffective hedger (“speculator”) otherwise. The empirical results show that risk exposures related to interest-rate, foreign exchange-rate, and commodity price decrease significantly for speculators but not for hedgers after the adoption of SFAS 133. Consistent with the decrease in risk exposures, I find that the volatility of cash flows for speculators also decreases significantly while the volatility of earnings remains unchanged. Overall, the evidence suggests that SFAS 133 has discouraged firms' speculative use of derivative instruments.

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