Date of Award
Doctor of Philosophy
This dissertation examines the effects of speculative derivative use on various aspects of firm valuation and performance. The majority of empirical accounting literature related to derivatives focuses on the use of hedging derivatives; whereas fewer studies examine the impact of derivative speculation on the firm. This dissertation explores the issues of whether and how speculation affects the cost of capital, corporate governance, manager ability, and the extent of real earnings management.The first paper investigates the effects of speculative use of trading interest rate derivatives under Accounting Standards Codification (ASC) 815 (previously SFAS 133- Accounting for Derivative Instruments and Hedging Activities) on earnings volatility and the cost of equity capital in the commercial banking industry. Prior research fails to differentiate between firms that successfully speculate with derivative instruments and those that are unsuccessful in determining the cost or benefit of speculation. This study provides evidence that firms that speculate successfully using trading derivatives tend to have lower earnings volatility and lower costs of equity than unsuccessful firms.The second paper investigates the impact of speculative derivative use on the cost of debt capital and whether corporate governance impacts firms’ speculative behavior. The results of this study indicate that creditors charge higher (lower) risk premia for speculating (hedging). In addition, the strength of corporate governance reduces the significance of gain/loss reporting for strongly governed firms.The third paper examines the impact of ASC 815, on the reporting behavior of non-financial firms. Under ASC 815 hedge ineffectiveness and all trading gains/losses are reported in current earnings, resulting in increased earnings volatility. As a result of this volatility, firms that use derivative instruments may resort to the use of real earnings management techniques to report smoother income. The study also examines whether manager ability impacts the significance of trading gains/losses and hedge ineffectiveness or firms’ decisions to engage in real earnings management activities to smooth income.The findings of this dissertation are useful to standard setters in evaluating the effectiveness of derivative disclosure regulation, to firm managers in considering risk management policies, and to investors in evaluating corporate risk management.
dissertation or thesis originally submitted to the local University of Memphis Electronic Theses & dissertation (ETD) Repository.
Hairston, Stephanie, "Speculative Derivative Use: External Financing Costs and Financial Reporting Effects" (2014). Electronic Theses and Dissertations. 966.