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When Do Accounting Earnings Matter More than Economic Earnings? Evidence from Hedge Accounting Restatements

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  • Linda Hughen

Abstract

This study examines behavior following a change in accounting treatment for derivative hedges due to the misapplication of hedge accounting. I examine firms faced with the following choice; one, maintain stability in economic earnings but increase the volatility of accounting earnings or two, maintain stability in accounting earnings but increase the volatility in economic earnings. I find that firms’ historic abilities to meet earnings targets are positively associated with the likelihood that firms will focus on accounting earnings rather than economic earnings. Results provide evidence of a change in management behavior following a change in accounting method.

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  • Linda Hughen, 2010. "When Do Accounting Earnings Matter More than Economic Earnings? Evidence from Hedge Accounting Restatements," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 37(9‐10), pages 1027-1056, November.
    • Handle: RePEc:bla:jbfnac:v:37:y:2010:i:9-10:p:1027-1056
    DOI: 10.1111/j.1468-5957.2010.02216.x
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    2. Philip Beaulieu & Louise Hayes & Lev M. Timoshenko, 2023. "Changes in accounting estimates: An update of priors or an earnings management strategy of “last resort”?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(3-4), pages 622-659, March.
    3. Hairston, Stephanie A. & Brooks, Marcus R., 2019. "Derivative accounting and financial reporting quality: A review of the literature," Advances in accounting, Elsevier, vol. 44(C), pages 81-94.
    4. Sticca, Ralph Melles & Nakao, Silvio Hiroshi, 2019. "Hedge accounting choice as exchange loss avoidance under financial crisis: Evidence from Brazil," Emerging Markets Review, Elsevier, vol. 41(C).
    5. Campbell, John L. & Mauler, Landon M. & Pierce, Spencer R., 2019. "A review of derivatives research in accounting and suggestions for future work," Journal of Accounting Literature, Elsevier, vol. 42(C), pages 44-60.
    6. Anbil, Sriya & Saretto, Alessio & Tookes, Heather, 2019. "How does hedge designation impact the market’s perception of credit risk?," Journal of Financial Stability, Elsevier, vol. 41(C), pages 25-42.

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