Joint Meeting of the Mid-Atlantic and Northeast Regions

Firms with Insiders Share Pledging and Financial Derivatives Usage

• In Event: Financial Instruments

Abstract

Financial derivatives have become popular tools for risk management activities, which in turn, result in affecting the cash flow volatility and earnings reporting. This study examines the relationship between insiders share pledging and the firm’s derivatives usage decisions. Specifically, we further classify the derivatives usage into hedging and trading purposes and further examine whether the corporate insiders with shares pledge are associated with distinctive purposes of derivatives usage decisions.
Empirical results document that insiders share pledging is negatively associated with a firm’s trading derivatives usage. It suggests that, as expected, trading derivatives usage will affect the earnings volatility and disadvantage to stock stability, thereby decrease the firm using trading derivatives. However, it is surprising to find that firms with insiders share pledging are also negatively associated with a firm’s hedging derivatives usage. This result can be attributed to the difficulty of ascertaining its hedging effectiveness in addition to its purpose in accounting treatment of financial reporting. This study implements several sensitivity tests and the results are robust to various specifications.

Authors

• Kui-ying Lin, National Yunlin University of Science & Technology

• Ching-Lung Chen, National Yunlin University of Science & Technology

• Tzu-Hao Lee, National Yunlin University of Science & Technology