Hedge Accounting and its influence on financial hedging: Evidence from Germany and Switzerland

Based on survey evidence from Germany and Switzerland we analyse the application of hedge accounting according to IAS 39 and its influence on the hedging behaviour of nonfinancial corporations. We find that about two thirds of the companies apply hedge accounting. Larger companies and companies that frequently use derivatives for hedging purposes are more likely to apply hedge accounting. The likelihood of the application of hedge accounting is also positively related to companies’ experience with IFRS and to the importance they attach to reduced earnings volatility. Contrary to our expectation we find that companies with growth opportunities are less likely to apply hedge accounting than companies in more mature markets. More than half of the companies that apply hedge accounting indicated that they are influenced in their hedging behaviour by IAS 39 hedge accounting rules. Size and frequency of derivatives use reduce the likelihood of a company being affected by the accounting rules in its hedging behaviour. Leverage, dispersion of ownership and growth opportunities are positively related to the likelihood that companies’ risk management is influenced by IAS 39. Furthermore, companies that follow selective, profit-oriented strategies that are based on forecasts of market rates (Glaum 2002, Lins/Servaes/Tamayo 2009) also appear to be affected by the hedge accounting rules. The results regarding the factors that determine whether companies are affected in their financial risk management by IAS 39 have to be interpreted with caution. They are not as strong as those regarding the application of hedge accounting, and they are sensitive to influential cases and to model specification.