An Empirical Research On How Derivatives Hedging Affects Earnings Management In Machinery Industry Of Listed Companys

The derivatives market has gradually developed into an important component of the capital market since the 20th century 70s. Well development of derivatives market and rational use of derivatives to hedge can be used to reduce future price volatility and improve market efficiency. But just in the past year with the global financial crisis, derivatives and futures market fluctuations are very severe; some companies with derivatives business have suffered huge losses in our country. Therefore, we should also be aware of that if we can't use derivatives properly, they will bring us huge risk. Meanwhile, with the constant development of China's securities market, the information disclosure of listed companies has always been the concern of all sectors of society, particular the problem of earnings management. Some domestic scholars have begun their system research about it from different perspectives. However, whether the use of derivatives to hedge would impact on the listed companies'earnings management? If it does, the impact is positive or negative? Domestic scholars have not yet been studied on these issues. But the research on these issues not only can guide the rational use of derivatives to hedge so that the derivatives can play a role in risk management but also can help the government find more methods and measures which can reduce earnings management.Based on this, this paper draws on research achievements at home and abroad. And on the basis of retrospective analysis the related literature about derivatives and earnings management, this paper explains the related theories about the relationship between derivatives and of earnings management. And to listed companies in China's machinery, equipment, instrumentation industry as an example, this paper selects the companies in this industry which use derivatives to hedge as samples. And with 2007-2008 data derived from sample firms'annual reports and semi-annual reports, using regression analysis model tools for hedging and earnings management of listed companies, this paper empirically analyzes how derivatives hedging affects the companies'earnings management. That is whether the use of derivatives to hedge can reduce the volatility of earnings and thus diminish the extent of company's earnings management. Finally, based on theoretical and empirical results, this paper provides countermeasures and suggestions about the rational use of derivatives to hedge for China's listed companies and government departments' supervision to control the corporate earnings management and so on.In the paper, we found that, although the theoretical analysis shows that using derivative instruments to hedge can reduce the volatility of the company's future cash flows and smooth accounting earnings, thus weaken the management motivation for earnings management, the empirical results show that firms holding derivative portfolios with large notional amounts have higher absolute levels of discretionary accruals, suggesting that derivatives did not really play a role in hedging in our firms. Therefore, this paper proposes that government should tighten supervision of derivatives business and vigorously nurture management talents; the enterprises themselves should raise awareness of risk as well and properly use of derivatives for risk management and so on.