EVIDENCE ON VOLUNTARY DISCLOSURES OF DERIVATIVES USAGE BY LARGE US COMPANIES

Abstract

Derivatives have been blamed in recent years for many financial disasters and there is evidence that disclosure influences hedging activity and corporate value. Nevertheless, standards for the mandatory disclosure of derivatives usage have been very controversial. This paper examines the nature and determinants of voluntary disclosures of currency derivatives usage by large industrial firms under SFAS 107 and has implications for the new derivatives disclosures under SFAS 133. This study documents that, consistent with higher disclosure levels being associated with lower cost of capital and higher shareholder value, firms with higher quality voluntary disclosures have higher market/book value ratios. However, consistent with agency, political, and disclosure cost arguments, industry leaders and firms with higher executive compensation in the form of stock options are more likely to have poor voluntary disclosure. In addition, we do not find any evidence indicating firms with more exposure to currency risk or firms with higher levels of currency derivatives usage provide increased disclosure of derivatives activity.