How Derivatives Hedging Afects The Level Of Earnings Management

Along with the understanding of the root cause of the crisis, people started viewing derivatives as a neuter risk management tool. As an emerging market, Chinese derivatives market has begun to take shape, especially the commodity futures market, has surpassed the United States as the world’s largest commodity futures market. However, using derivatives to hedge is still subject to many constraints, the commodity futures market is lack of variety and investors are not mature enough. Some Chinese enterprises loss because of using derivatives. Thus, we are eager to know whether the use of derivatives can help companies effectively manage risk and smooth performance. As investors always preference to have stable performance of the enterprise, managements tend to reduce the fluctuation of enterprise performance,In fact, enterprises often use earnings management to adjust profit. When the hedging increase the volatility of profit, companies may increase the accruals items in order to smooth the earnings.In this context, this paper makes the theoretical and empirical research on the relation between hedging and earnings management. Firstly, we analysis Chinese derivatives market development and point out the favorable conditions and restricted factors of Chinese listed companies’ engagement in hedging. Then we introduced the theory of hedging and earnings management, and elaborate that hedging and earnings management are profit adjustment tools. For a more comprehensive study of hedging and earnings management, we add macroeconomic factors. The study period is divided into two parts. The first part is from2008to2009, namely economic recession period; the second part is from2010to2011, namely economic recovery period. Through regression analysis model by statistics software STATA, this paper makes an empirical research about the influence of hedging on earnings management.The empirical results show that:(1)The number of listed companies which use derivatives to hedge is very few and concentrate in the manufacturing industry.(2) In the period of recession, the investment incomes of derivatives are significantly lower.(3) In the recession period, the earnings management level of companies which use derivatives to hedge is higher than without using derivatives companies’.(4) In the recovery period, the earnings management level of companies which use derivatives is significantly lower than without using derivatives companies’. In view of this, this paper presents some suggestions:(1)accelerate the development of derivatives market,(2)improve firms hedging skill and information disclosure,(3)strengthen the financial supervision.