Corporate Risk Management of Bank Holding Companies in the SFAS133 Framework

The goal of this research was to investigate the controversy surrounding the inability of SFAS 133 to portray the economics of hedging. The problem stemming from the initiation of SFAS 133 is that the possibility of increased volatility, which evolved from economic hedges, might have prompted some BHCs to adjust their risk strategy to avoid analysts' negative stock valuations. The purpose of the study was to investigate the extent to which BHCs adapted a more accounting-responsive corporate risk management policy to manipulate earnings. Following the theoretical framework of corporate risk management, a causal-comparative design was used to determine the different hedging activities of SFAS133-compliant and SFAS133-accounting hedgers before and after the 2008 amendment of SFAS 133. The derivative activities of the entire population of Peer 1 and 2 BHCs of the Federal Reserve, which consists of 167 banks, were examined and the data were collected from BHCs 10-K SEC filings. The results of descriptive statistics, t tests, and multiple regressions indicated that BHCs which increased their level of accounting hedges and decreased their level of economic hedges experienced a significant decrease in earnings volatility relative to pre-SFAS 133. These findings suggest that BHCs' ability to reduce earnings volatility and increase earnings smoothing to meet analysts' expectations after the 2008 amendment of SFAS 133 has an adverse impact on BHCs' continual use of economic hedges. Analysts and investors are recommended to evaluate further BHCs' risk strategies to gain a better representation of their risk paradigm. This study extends prior research on corporate risk management activities of BHCs and contributes to social change by presenting new affirmation to investors of the influence of SFAS 133 economic hedges on earnings volatility.