Hedge Proportion, Risk Disclosure Formats Of Hedged Items And Investors’ Judgments

Regulators and standard setters of many countries required that the listed company must provide risk information about company’s derivatives so that the investors can have sufficient information to understand and judge the risk of the company. Given the complexity of derivatives risk and difficulties in communicating risk information, whether the investors can make full use of currently available information to make appropriate investment judgments need to be explored. Based on information processing theory, cognitive fit theory, and risk perception theory of psychology, the dissertation examines the effect of the presence of hedge, hedge proportion and risk disclosure formats of hedged items on individual investors’ investment judgments by experimental methods.The dissertation is composed of six chapters. Chapter one gives an overall introduction of this study, including research questions, research background, implications, research framework, research method and innovations, etc; Chapter two reviews and comments on the existing literatures on risk information disclosure, use of derivatives and hedge, and information disclosure formats; Chapter three draws upon information processing theory, cognitive fit theory and risk perception theory of psychology to develop the hypotheses about the effect of the presence of hedge, hedge proportion and risk disclosure formats of hedged items on individual investors’ investment judgments; Chapter four describes the experimental design, including manipulation of independent variables and measurement of dependent variables, participants selection and procedure; Chapter five analyzes the data and verifies the hypotheses; Chapter six concludes the whole dissertation and discusses the limitations of the study and the directions for future research.The main conclusions of the dissertation are listed as follows:1. Theoretical analysis shows that, for the reason of limited information processing capability and choice of information processing strategy, the presence of hedge and risk disclosure formats of hedged items affect individual investors’ investment judgments. Meanwhile, hedge proportion and risk disclosure formats of hedged items affect individual investors’ investment judgments. In addition, perceived risk controllability and net income volatility by individual investors will mediate the effect of hedge proportion or risk disclosure formats of hedged items on individual investors’ investment judgments.2. The experimental results indicate that the presence of hedge and risk disclosure formats of hedged items affect individual investors’ investment judgments. When the companies disclose qualitative information about fuel price volatility risk, investors will assess the riskiness of an investment in companies who hedge fuel price risk higher, and investment attractiveness lower as compared to those who do not hedge fuel price risk; when the companies disclose quantitative information about fuel price volatility risk, investors will assess the riskiness of an investment in companies who hedge fuel price risk lower, and investment attractiveness higher as compared to those who do not hedge fuel price risk.3. The experimental results indicate that hedge proportion and risk disclosure formats of hedged items affect individual investors’ investment judgments. Individual investors’ investment judgments about companies with different hedge proportions depend on risk disclosure formats of hedged items. Specifically, when the companies disclose qualitative information about fuel price volatility risk, investors will assess the riskiness of an investment in companies who hedge a large portion of anticipated purchases of fuel higher, and investment attractiveness lower as compared to those who hedge a small portion of anticipated purchases of fuel; When the companies disclose quantitative information about fuel price volatility risk, investors will assess the riskiness of an investment in companies who hedge a large portion of anticipated purchases of fuel lower, and investment attractiveness higher as compared to those who hedge a small portion of anticipated purchases of fuel.4. The experimental results indicate that different risk disclosure formats of hedged items lead the investors to make different investment judgments for the companies with the same hedge proportion. Specifically, when the companies hedge a large portion of anticipated purchases of fuel, investors will assess the riskiness of an investment in companies who disclose quantitative information about fuel price volatility risk lower, and investment attractiveness higher as compared to those who disclose qualitative information about fuel price volatility risk; when the companies hedge a small portion of anticipated purchases of fuel, investors will assess the riskiness of an investment in companies who disclose quantitative information about fuel price volatility risk higher, and investment attractiveness lower as compared to those who disclose qualitative information about fuel price volatility risk.5. The experimental results show that individual investors’assessment of risk controllability partially mediates the effect of hedge proportion or risk disclosure formats of hedged items on investors’ net income volatility judgment; investors’net income volatility judgment partially mediates the effect of risk controllability on investors’ investment risk judgment; investors’investment risk judgment fully mediates the effect of investors’ net income volatility judgment on investors’ investment attractiveness judgment.