Derivatives use and analysts’ forecasts: new evidence on the mechanisms from China

Abstract

We examine whether and how corporate derivative use affects analysts' earnings forecast accuracy based on Chinese A-share listed firms during 2010 and 2020. We find that derivative users experience less accurate forecasts, compared to non-users. Such effects are more pronounced for SOEs and firms without risk exposure. Mechanism tests suggest that the negative effects of derivatives on analysts' forecasts are primarily due to ineffective hedging, high complexity and insufficient disclosure. Further analysis indicates that the implementation of Hedging Accounting Standards, the provision of management forecasts, and analysts’ capabilities help to mitigate the adverse impact of derivative use on analysts' forecasts.