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Assessing the Information Content of Mark‐to‐Market Accounting with Mixed Attributes: The Case of Cash Flow Hedges

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  • FRANK GIGLER
  • CHANDRA KANODIA
  • RAGHU VENUGOPALAN

Abstract

We examine how outsiders rationally interpret a reported loss on derivatives when the application of mark‐to‐market accounting to cash flow hedges creates a mixed attribute problem. We find that because of the mixed attribute problem, the information content of mark‐to‐market accounting is related to the information content of historical cost accounting in a very specific way. This relationship allows us to identify the circumstances under which mark‐to‐market accounting facilitates and when it detracts from the objective of providing an early warning of potential financial distress. We show that the reporting of an impending derivative loss by a distressed firm can actually lead outsiders to infer that the firm is in a better financial position than what they would have inferred under the silence associated with historical cost accounting. Without the mixed attribute problem, mark‐to‐market accounting would always yield more accurate assessments of the firm's financial position.

Suggested Citation

  • Frank Gigler & Chandra Kanodia & Raghu Venugopalan, 2007. "Assessing the Information Content of Mark‐to‐Market Accounting with Mixed Attributes: The Case of Cash Flow Hedges," Journal of Accounting Research, Wiley Blackwell, vol. 45(2), pages 257-276, May.
    • Handle: RePEc:bla:joares:v:45:y:2007:i:2:p:257-276
    DOI: 10.1111/j.1475-679X.2007.00232.x
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    References listed on IDEAS

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    Cited by:

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    2. Argilés bosch, Josep M.a & Aliberch, Anna Sabata & Blandón, Josep García, 2012. "A Comparative Study of Difficulties in Accounting Preparation and Judgement in Agriculture Using Fair Value and Historical Cost for Biological Assets Valuation," Revista de Contabilidad - Spanish Accounting Review, Elsevier, vol. 15(1), pages 109-142.
    3. Akhigbe, Aigbe & Makar, Stephen & Wang, Li & Whyte, Ann Marie, 2018. "Interest rate derivatives use in banking: Market pricing implications of cash flow hedges," Journal of Banking & Finance, Elsevier, vol. 86(C), pages 113-126.
    4. Li Yu (Colly) He & Sue Wright & Elaine Evans, 2018. "Is fair value information relevant to investment decision-making: Evidence from the Australian agricultural sector?," Australian Journal of Management, Australian School of Business, vol. 43(4), pages 555-574, November.
    5. Hoang, Daniel & Ruckes, Martin, 2014. "The effects of disclosure policy on risk management incentives and market entry," Working Paper Series in Economics 65, Karlsruhe Institute of Technology (KIT), Department of Economics and Management.
    6. Dennis Frestad, 2018. "Managing earnings risk under SFAS 133/IAS 39: the case of cash flow hedges," Review of Quantitative Finance and Accounting, Springer, vol. 51(1), pages 159-197, July.
    7. 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).
    8. 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.
    9. Malgorzata Wegrzynska & Alina Nowotarska, 2021. "Measuring and Valuation of Biological Assets: A Research Study," European Research Studies Journal, European Research Studies Journal, vol. 0(2), pages 331-345.
    10. Hyun Song Shin, 2007. "Discussion of Assessing the Information Content of Mark‐to‐Market Accounting with Mixed Attributes: The Case of Cash Flow Hedges and Market Transparency and the Accounting Regime," Journal of Accounting Research, Wiley Blackwell, vol. 45(2), pages 277-287, May.
    11. Li, Jing, 2017. "Accounting for banks, capital regulation and risk-taking," Journal of Banking & Finance, Elsevier, vol. 74(C), pages 102-121.
    12. Chakravarty, Sugato & Ray, Rina, 2020. "On short-term institutional trading skill, behavioral biases, and liquidity need," Journal of Corporate Finance, Elsevier, vol. 65(C).

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