The Effects of Financial Derivatives on Earnings Management and Market Mispricing

Oktavia Oktavia; Sylvia Veronica Siregar; Ratna Wardhani; Ning Rahayu

doi:10.22146/gamaijb.34112

The Effects of Financial Derivatives on Earnings Management and Market Mispricing

Oktavia Oktavia, Sylvia Veronica Siregar, Ratna Wardhani, Ning Rahayu

(Submitted 20 March 2018)

(Published 27 December 2019)

Abstract

This study aims to examine the effects of financial derivatives on earnings management and market mispricing. A cross-country analysis was applied within the scope of four ASEAN (Association of Southeast Asian Nations) countries that comply with IAS 39, consisting of the Philippines, Indonesia, Malaysia, and Singapore. A sample of 1,395 firm-years of companies using financial derivatives were engaged for study and the evidence shows that the use of financial derivatives for hedging purposes decreases the magnitude of the earnings management. In addition, this study also supports the idea that earnings expectations embedded in the stock returns of companies using financial derivatives, that meet the hedge accounting criteria, reflect the difference in the persistence of cash flow components more accurately than those using financial derivatives for speculative purposes.

Keywords

Financial derivatives, earnings management, earnings persistence, market mispricing

Full Text: PDF

DOI: 10.22146/gamaijb.34112

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