Do analysts understand the economic and reporting complexities of derivatives?

Research output: Contribution to journalArticle

Abstract

We investigate whether and how the complexity of derivatives influences analysts' earnings forecast properties. Using a difference-in-differences design, we find that, relative to a matched control sample of non-users, analysts' earnings forecasts for new derivatives users are less accurate and more dispersed after derivatives initiation. These results do not appear to be driven by the economic complexity of derivatives, but rather the financial reporting of such economic complexity. Overall, despite their financial expertise, analysts routinely misjudge the earnings implications of firms' derivatives activity. However, we find evidence that a series of derivatives accounting standards has helped analysts improve their forecasts over time.

Original languageEnglish (US)
Pages (from-to)584-604
Number of pages21
JournalJournal of Accounting and Economics
Volume61
Issue number2-3
DOIs
StatePublished - Apr 1 2016

Keywords

  • Derivatives
  • Earnings forecasts
  • Economic complexity
  • Hedging
  • Reporting complexity
  • Sell-side analysts

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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