The Effects of Derivatives on the Earnings Volatility of Portuguese and Spanish Listed Companies
Abstract
The main objective of this paper is to analyse the purposes and effects of using derivatives in Portuguese and Spanish firms. For this purpose, two panel data regression models were estimated, with accounting data and firms' financial cash flow data, as well as the fair value of derivatives. The aim of the first regression was to investigate the impact of the use of derivatives on earnings volatility. The second model was to investigate the use of derivatives through financial cash flows. The results of the first model suggest that an increase in the extent of derivatives reduces earnings volatility. The second model presents debt and exchange rate effects on cash flows that may cause changes in the fair value of derivatives. Furthermore, in the second model, operating income was statistically significant for the use of derivatives, these results may indicate that the extent of derivatives can be driven by operating income. The analyses conducted also indicate that firms engage derivatives for risk management purposes, thus these derivatives are mainly measured as a hedge accounting instrument. This research has contributed to the scientific literature on derivatives by investigating the effects of the use of derivatives on the volatility of earnings of Portuguese and Spanish non-financial firms, as well as how derivatives respond to the financial cash flow sensitivities of these firms.
Copyright (c) 2022 Ana Catarina de Paula Leite, Liliana Marques Pimentel
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