Use of Derivatives and Analysts’ Forecasts: New Evidence from Non‐financial Brazilian Companies

Abstract

This study investigates whether market analysts’ forecasts are influenced by the presence of derivative financial instruments in listed firms. From a sample of firms comprising 1173 derivative users and 7797 non‐users for the 2006–14 period, the results indicate the existence of less error behaviour (bias) on earnings per share forecasts for derivative user firms compared to non‐user firms. This finding suggests that these instruments may be used to protect businesses and provide greater stability in the results of companies that use them. The presence of derivative financial instruments is increasing among listed firms, and management can use them for hedging or speculation (thus mitigating or increasing risk). The literature contains few studies on this issue, and the general understanding relies on the assumption that derivative financial instruments provide relevant information for decision making.

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

“…It should be mentioned that the aspects related to the positive perception of hedge derivatives use by investors, as clarified by the studies from Koonce et al (2008Koonce et al ( , 2015, and the points regarding the complexity of these financial instruments, presented by Kawaller (2004), Campbell (2015), Chang et al (2016), and Antônio et al (2019), permeate the elaboration of the research hypothesis. Therefore, the studies presented below in this review are relevant for understanding the formulation of this study.…”

“…Along these lines, some studies have highlighted the difficulty in understanding the information associated with derivatives use. Standing out among these studies are those of Kawaller (2004), Campbell (2015), Chang et al (2016), and Antônio et al (2019). Campbell (2015) highlighted that the results of his study suggest that the cash flow hedging disclosures linked to Financial Accounting Standards Board rule n. 133 (FASB, 1999) were complex and incomplete; while, along these same lines, Chang et al (2016) argued that derivatives represent one of the most complex types of financial contracts, thus creating a significant challenge for companies that use these instruments to report them.…”

“…Another relevant aspect relates to the complexity of derivatives, as indicated by some of the literature, notably highlighted in the studies by Campbell, Downes, and Schwartz (2015), Chang, Donohoe, and Sougiannis (2016), and Antônio, Lima, and Rathke (2019). The complexity can make it difficult to analyze and interpret the dynamics surrounding the derivatives, transactions, and information generated by the use of these instruments.…”

Effects of the exchange rate on the adoption of hedge accounting: evidence from Brasil

“…Regarding derivatives use, Barton (2001) has examined its effects on earnings management behavior, affirming that managers can use derivatives to reduce the volatilities of earnings and cash flow arising from changes in foreign exchange rate and other risk factors, suggesting that derivatives lessen their incentive to reduce earnings volatility through regular earnings management devices, so managers do use them as partial substitutes to smooth earnings and to reduce agency costs, income taxes and information asymmetry. Regarding the first question we found in prior research mixed-evidence on whether earnings smoothing affects performance informativeness, being positively, such as in Hughen (2010) and Antônio et al (2018), being negatively, such as in Gigler et al (2007), Campbell (2015 and Campbell et al (2015). Hence, besides addressing the first question in our model, in the following topic we discuss probable answers to Dechow et al's (2010) second query on hedge accounting choice determinants, among which we believe loss avoidance (earnings management) is considered.…”

“…In the same sense, Antônio et al (2018) and not allowing an outsider to infer the firm's financial position if the firm is less than entirely hedge (GIGLER et al, 2007).…”