The Research On The Economic Consequences Of Derivative Use And Information Disclosure

The 19 th Communist Party of China National Congress and the 2018 Central Economic Working Conference emphasized that �focus on improving the ability of finance to service the real economy�.In the context of �international financial market turmoil,continuous Sino-US trade frictions,large fluctuations in international commodity prices,significant increase in unstabilities and uncertainties,rise in external input risks�(2019 Report on the Work of the Government),how to properly use derivatives,reduce the impact of exchange rate,interest rate,commodity price fluctuations on business operations,pre-locking future sales prices,purchase prices,exchange rate costs or interest costs to ensure stable operation and sustainable development of enterprises,is an important part for finance to support the development of the real economy;It is also the cornerstone for achieving multiple government goals such as �stable growth and risk prevention� and promoting sustained and healthy economic development.The derivatives market has flourished exponentially over the past 30 years.On average,about 60.5% of the listed companies in the world use derivatives.Due to the differences in marketization,capital market development and openness,legal system,and regulatory environment,the development path of derivatives in China is quite different from that of developed countries.In China,only about 15% listed companies use derivatives,the percentage is relatively low,but it is increasing year by year.From the perspective of derivative types,forward and futures are more commonly used to hedge exchange rate risk and commodity price risk,which is different from developed countries such as the United States and the United Kingdom;The accounting supervision related to derivatives begins with the accounting treatment of commodity futures,and has gone through three stages: the initial stage of accounting standards,the establishment and improvement of the accounting standard system;overall,to a certain extent,it lags behind developed countries.For the disclosure of derivative information,the disclosure of derivatives-related information is fragmented,and not comparable,and the key information of derivatives is missing in some companies.Therefore,the economic consequences of the derivatives use of Chinese companies may also be quite different from those of developed countries.At present,the topics of derivatives research are extensive,including drivers,impact on company value and external stakeholders,etc.Domestic research on derivatives began around the Asian financial crisis,limited by data,there are few studies on economic consequences,and research focused on the impact on firm value,but lacked research on the mechanism;a few scholars studied the risk management effects of derivatives use,and the use of derivatives to external stakeholders is even rarer.The effect of risk management of derivatives and the impact of derivatives on investment and financing behavior are the real effect of the derivatives use,and thus are a vital component of derivatives research.Based on hand-collected data,this paper examines the economic consequences of derivatives use and information disclosure by taking samples of A-share non-financial listed companies with exchange rate,interest rate or commodity price exposure in 2010-2016.Specifically,This paper includes: the risk management effect of derivatives use and information disclosure;on this basis,the effect of derivatives on the company's ability to borrow and capital expenditure and its mechanism,and the impact on company value;Third,the impact of derivatives use and information disclosure on the behavior of external information users.This paper takes financial analysts as an example,and examine the effct of derivatives use and information disclosure on the accuracy of analysts' earnings forecasting.In order to control the possible firm fixed effect and autocorrelation problems,this paper adopts double clustering robust standard error(firm and year)in the regression;in the study of the effect of derivative on risk management and the influence of derivative use on investment and financing level,in order to avoid the reciprocal causation endogenous problem,the dependent variables are lagged by one year.The main research findings of this paper include the following three parts:First,the risk management effect of derivatives use.Based on the previous relevant research,we adopt the standard deviation of the next three years(including the current year)cash flow fluctuations,the stock's Beta coefficient and the standard deviation of stock daily rate of return to measure the company's risk.The study finds that the use of derivatives is significantly negatively correlated with the company's cash flow volatility,and there is no significant relationship between the use of derivatives and the Beta coefficient and volatility of and the stock daily returns.Compared with those that do not use derivatives,the cash flow volatility of derivative users is lower,but the derivative use has nothing to do with the risk in capital market.That is,the use of the derivative reduces the future cash flow volatility of the derivative users,but the risk management effect is not passed to the capital market.After replacing risk measurement,replacing regression methods,using treatment effect models,and propensity score matching methods to control endogeneity,the results remains robust.Further research finds that:(1)the higher the derivatives use intensity,the lower the future cash flow volatility of the company;however,there is no significant correlation between the derivatives use intensity and the Beta coefficient and the volatility of daily stock returns,indicating that the higher the derivatives use intensity,the lower of future cash flow volatility,but this information cannot be reflected in the capital market;(2)From the perspective of derivative types,forwards,options and futures has better effect in reducing cash flow volatility,and there is no significant relation between the types of derivatives and the Beta coefficient and the volatility daily stock returns;(3)From the perspective of risk,the exchange rate risk hedging and commodity price risk hedging are significantly negatively correlated with the company's cash flow volatility,indicating that hedging foreign exchange volatility and commodity price volatility are the most important role of the company's derivatives use.Similarly,the capital market is not sensitive to hedging risk types;(4)This paper takes 811 exchange reform as an exogenous shock,studies the differences in the risk management effect of derivatives before and after 811 exchange reform,and finds that compared to compaiese that do not use foreign exchange derivatives,the risk of foreign exchange derivatives users is lower after the 811 exchange reform.That is after the 811 exchange rate reform,the risk management role of exchange rate derivatives has been further enhanced,and has been reflected in the capital market;(5)This paper studies the impact of derivatives information disclosure.Derivatives users which disclose the key information of derivatives,the Beta coefficient and volatility of daily stock returns are smaller,indicating that the disclosure of key derivatives information significantly reduces the company's risk in capital market;(6)This paper examines the impact of derivative related accounting standards reform,and finds that the reforms in derivatives-related accounting standards have effectively improved the risk management effect of derivatives in the capital market.Second,this paper discussses the impact of derivatives use on the company's ability to borrow and investment level.Based on previous research,this paper uses the proportion of new debts to the total amount of assets at the end of the previous year to measure the company's ability to borrow,and uses the company's percentage of capital expenditure to operating income to measure the company's investment level,and finds that derivatives use is significantly negatively correlated with the company's new debt ratio and capital expenditure level,that is compared to companies that do not use derivatives,derivatives users' s new debt levels and capital expenditure level is lower.After replacing the measurement of new debt level and capital expenditure,replacing regression methods,and controlling endogeneity,the results are robust.Further research on derivatives use and the company's ability to borrow has found that:(1)There is no significant correlation between the derivatives intensity and the company's new debt level;(2)Derivatives mainly reduce the company's ability to borrow long-term debt,and this is consistent with the fact that derivatives are mainly used to hedge short-term risks;(3)Key information disclosure of derivative is benifical to derivative user's ability to borrow,and reduce the negative impact of derivatives use on debt borrowing;(4)The reforms in derivatives-related accounting standards in 2004 improves the negative impact of the use of derivatives on the ability to borrow;(5)This paper finds that the use of derivatives mainly reduces the ability to borrow in non-state-owned listed companies,and does not have significant impact on state-owned listed companies.Further research on the use of derivatives and the level of corporate investment finds that:(1)the higher the derivatives use intensity,the lower the level of capital expenditure;(2)The key information disclosure of derivatives has no significant impact on the level of capital expenditure;(3)The implementation of derivative accounting standards in 2014 helps to improve the adverse impact of derivatives on capital expenditures;(4)Derivatives use mainly reduces the level of capital expenditures of non-state-owned enterprises;(5)Compared with companies that do not use derivatives,when the new debt is less than zero,derivatives users have less capital expenditures;(6)Abundant internal funds have eased adverse effects of derivatives use on capital expenditures.After studying the impact of derivatives use on new debt levels and capital expenditure levels,this paper further studies the impact of derivatives use on the company value,and finds that derivative use is negatively correlated with Tobin's Q value,and derivative information disclosure and related accounting standards changes help to improve the adverse impact of derivative use on company value.Third,this paper examines the effect of derivatives use on analysts' forecasting accuracy.The research finds that analysts have lower accuracy in forecasting earnings of derivatives users.After controlling endogeneity,replacing interpreted variables and regression methods,the results still exist.Further analysis reveals that when the risk management of derivatives is invalid,the analysts forecast accuracy is lower.The economic complexity and accounting complexity of the derivatives are significantly negative with the accuracy of the analyst's earnings forecast.Derivative key information disclosure significantly improves the accuracy of analysts' earnings forecasts.That is,ineffective risk management and complexity have plagued analysts' earnings forecasts,and derivatives' key information disclosure and related accounting standerd reform has significantly improved the adverse impact of derivatives use on analysts' earnings forecasts.The possible contributions of this paper are as follows: First,the variable measurement,based on the use of dummy variables to measure the use of derivatives,using the fair value of derivatives in the total assets to measures the degree of derivatives use,enriches the measurement dimension of derivatives use and improves the accuracy of measurement;Second,this paper finds that the use of derivatives reduces the future cash flow volatility of the company,but the risk management effect is not transmitted to the capital market performance;For the first time,this paper studies of the role of derivatives use on analysts' earnings forecasts,and finds that the risk management effects,complexity and information disclosure affect the analyst's earning forecast accuacy.Third,this paper finds that derivatives key information disclosure improves derivative risk management effects,the adverse effect on debt borrowing ability and analyst earnings forecasts,and provides experience and reference for improving the use of derivatives;Fourth,based on the implementation of Fair Value Measurement,the Financial Instruments Presentation Guidelines(2014 revised),and the Interim Provisions on the Accounting Treatment of Futures Hedging,this paper finds that the reforms in derivatives-related accounting standards have significantly improved the role of derivative risk management,the ability to raise debt and the analysts' earnings forecasts accuracy,providing empirical support for the accounting and finance to support of the entity's economic development;Last,this paper further enriches literature on the derivatives economic consequences in emerging market countries.