AAA Spark Meeting of Regions

SFAS161 Derivative Disclosures and Interest Rate Risk Exposure—Evidence from Fair Value Hedge

• In Event: FAR: Corporate use of Social Media and SAFS 161

Abstract

This study examines the association between mandatory derivative disclosures and interest rate risk exposure. My sample of S&P 500 nonfinancial firms that used interest rate swaps (IRS) to mitigate interest risk demonstrates that SFAS161 derivative disclosures of notional and fair values are risk relevant. This sample consists of 37 firms designating interest rate swaps as fair value hedges from 2014 to 2019. First, this study documents that notional value in IRS is negatively associated with interest rate risk exposure in the perfect hedge group. Second, this study documents that change in fair values are positively associated with interest rate risk exposure in the partially effective group. Finally, this study demonstrates that current period change in fair values of IRS helps predict future interest rate risk exposure in the perfect hedge group. These findings contribute to the discussion regarding regulatory transparency, risk relevance of derivative disclosures, and usefulness of these mandatory disclosures. These findings also inform the ongoing debate on fair value accounting for derivatives and complement ongoing research into the real effects of accounting standards (Ryan 2007). This study contributes to the literature by exploring the risk relevance and usefulness of notional and fair values of derivatives using panel data in a post-SFAS161 (ASC 815-10-50) regime.

Author

• Qiuhong Zhao, Texas A&M University - Corpus Christi