Asymmetric information and corporate derivatives use

✍ Scribed by Peter Dadalt; Gerald D. Gay; Jouahn Nam

• Book ID: 102216766
• Publisher: John Wiley and Sons
• Year: 2002
• Tongue: English
• Weight: 159 KB
• Volume: 22
• Category: Article
• ISSN: 0270-7314
• DOI: 10.1002/fut.2216

✦ Synopsis

Abstract

We investigate the relationship between derivatives use and the extent of asymmetric information faced by the
firm. Using alternative analyst forecast proxies for asymmetric information, we find evidence that both the use of
derivatives and the extent of derivatives usage is associated with lower asymmetric information. Specifically, for
firms using derivatives (notably currency derivatives) we find that analysts' earnings forecasts
have significantly greater accuracy and lower dispersion. These findings support the conjectures of DeMarzo and
Duffie (1995) and Breeden and Viswanathan (1998) who argue that hedging reduces noise related
to exogenous factors and hence decreases the level of asymmetric information regarding a firm's earnings.
© 2002 John Wiley & Sons, Inc. Jrl Fut Mark 22: 241–267, 2002