Three Studies on Hedging Activities and Managerial Opportunism





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This thesis presents three studies on managerial opportunism in hedging activities. The first study examines whether the implementation of mandatory derivative disclosures under Financial Accounting Standard No. 161: Disclosures about Derivative Instruments and Hedging Activities (FAS 161) altered the relative merit of discretionary accruals and financial derivatives for income smoothing. Discretionary accruals and financial derivatives have been identified as complements in terms of income smoothing during the Financial Accounting Standard (FAS) 133 period (Choi, Mao, & Upadhyay, 2015). However, the subsequent adoption of FAS 161 may affect the relationship between derivative hedging and accruals management. Using a sample of S&P 500 non-financial firms during 2002-2016, I find that the positive relationship between discretionary (current and working capital) accruals and financial derivatives documented by Choi et al. (2015) is attenuated following the implementation of FAS 161. The results are robust to the use of alternative measures of discretional accruals and a sample of continuing firms, excluding firms using derivatives for trading purposes and those making derivative-related misstatements. I also document that the weakening in the relationship between derivatives and discretionary accruals after the implementation of FAS 161 is more pronounced for firms that bear high disclosure costs and those in highly competitive industries. Overall, my results suggest that a material change in disclosure rules can influence the method of income smoothing. The second study investigates the impact of share pledging by corporate insiders (i.e. directors, executives) on non-GAAP reporting. Using a hand-collected dataset covering publicly listed U.S. firms for the period 2006-2019, I find that share pledging is positively associated with the likelihood of non-GAAP reporting and negatively related to the quality of non-GAAP reporting. The results are robust to employing alternative measures of non-GAAP reporting quality, using a propensity score matched sample, and conducting a difference-in-differences analysis based on pledging initiation. Further analyses show that the effect of share pledging on the likelihood and quality of non-GAAP reporting is more pronounced for firms with less analyst coverage and fewer independent boards. Overall, the results suggest that insiders who have shares under pledge report non-GAAP earnings opportunistically. The third study explores the impact of share pledging on workplace safety. Using establishment-level data on workplace safety from Occupational Safety and Health Administration, I find that firms with insider share pledging exhibit higher workplace injury/illness. The channel analyses suggest that the higher injury/illness in pledging firms are associated with declines in safety investments. Further analysis shows that the documented association between share pledging and workplace safety is weaker for firms with more analyst coverage, facing higher pressure from labour unions, located in states with higher workers' compensation premiums, and operated in counties with higher social capital. The results are robust to using injury rate as an alternative measure of workplace safety, controlling for accrual-based earnings management, and firm-level analyses. Overall, the findings suggest that managers with share pledging compromise workplace safety to support share prices.






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