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Does Derivative Use Enhance Earnings Quality and Value Relevance of Earnings? Evidence from Emerging Market
Shu - Miao Lai, National Chengchi University
Chih - Liang Julian Liu, National Taiwan University
ABSTRACT. This study attempts to investigate whether firms hedge with derivates for managing earnings volatility, which can enhance earnings quality and value relevance of reported earnings. The empirical results reveal that managers use derivatives to reduce earnings volatility by adjusting the volatility of cash flows. Further, firms with lower earnings volatility resulting from hedging purpose have higher earnings quality. Finally, a derivative user's earnings information is more value-relevant to investors. Overall, we find that derivative usage can improve earnings quality and value relevance of earnings.
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