Does the use of hedge derivatives improve the credit ratings of Brazilian companies?

Abstract

The purpose of this study is to identify the factors that may explain the attribution of credit ratings to firms, focusing especially on the impact of derivatives. The gap explored by this research lies in the novelty of analyzing how rating agencies perceive the effects caused by information related to derivatives use by Brazilian publicly-traded companies. In addition, this study shifts the previous findings from stock analysts to rating agencies, reinforcing the discussion about the complexity of derivatives in the credit risk assessment process. This research topic is currently of interest due to the adoption of International Financial Reporting Standard (IFRS) 9 (Accounting Pronouncements Committee - CPC - 48), which came into effect in January of 2018. Based on these rules, the main novelty presented in this article was its verification of the effect of the derivatives used by companies in order to hedge their credit ratings, thus helping to fill the empirical gap that exists in the literature from the area. The results found challenge the theory that the use of hedge derivatives is viewed positively by investors. However, although no significant statistical impact was found on the ratings of companies that use derivatives, it was observed that the companies that use derivatives and have the highest notional values were those that received the best ratings from Moody’s. With this we broadened the debate about the complexity of the information linked to derivatives use. In the study, 2,090 ratings attributed to non-financial companies with stocks traded on the Brasil, Bolsa, Balcão [B]³ exchange were examined between 2010 and 2016 by using panel data analysis, which lends robustness to the analysis and findings. Contrary to the central hypothesis of this research, the results presented here show that, in Brazil, companies that use derivative financial instruments for hedging do not receive the best credit ratings from rating agencies. One of the main contributions of this study is the evidence that Standard & Poor’s and Moody’s were unable to consistently incorporate information related to derivatives use, thus broadening the discussion about the complexity of these financial instruments.

Hedging Policies to Reduce Agency Costs in Brazil

“…The first year of the period analyzed coincides with the mandatory adoption by listed Brazilian companies of International Financial Reporting Standards (IFRS), i.e., as of 2010, aligned with the study of Antônio et al (2020). According to Murcia and Santos (2009), this obligatory adhesion increased the quality of the information disclosed by companies and also promoted convergence of the accounting information of Brazilian companies and their peers in other countries.…”

“…To measure the use of hedging, we used the proxy studied by Gay and Nam (1998), Graham and Rogers (2002), Júnior (2007), Carneiro and Sherris (2008), and Antônio et al (2020). Equation (2) specifies the calculation of this variable:…”

“…However, studies such as Géczy et al (2007), Murcia and Santos (2009), Fauver and Naranjo (2010), Aretz and Bartram (2010), and Lel (2012) found that these relations established by those authors are softened by mechanisms implemented by the stakeholders of companies. In another line of research, Antônio et al (2020) found that the use of derivatives has not been fully incorporated by the rating agencies in their credit ratings. Géczy et al (2007), Fauver and Naranjo (2010), and Lel (2012) all argued that the shareholders impose mechanisms such as executive compensation agreements and enhanced levels of corporate governance to align their interests with those of the managers.…”

Empresas que usam derivativos para hedge conseguem uma redução do risco?

“…Posto isso, a análise dos dados se estendeu até o ano de 2017 pois a partir de janeiro de 2018 a regra de contabilização dos instrumentos financeiros foi alterada pelo IFRS 9. Além disso, o estudo seguiu critérios semelhantes aos adotados anteriormente por Antônio et al (2020). A Tabela 1 apresenta as variáveis utilizadas no estudo e suas respectivas fontes informacionais.…”

“…Outros estudos, no entanto destacaram a complexidade dos derivativos como os desenvolvidos por Campbell, Downes e Schwartz (2015), Chang, Donohoe e Sougiannis (2016) e Antônio et al (2019). Nessa vertente, Antônio et al (2020) reportaram que que o uso dos instrumentos derivativos para hedge não foi incorporado completamente pelas agências de ratings.…”