Does hedge accounting reflect firms' risk management activities

In this study, I examine the hedge accounting disclosures required under ASC Topic 815, i.e., SFAS 133 (as amended), to investigate whether existing hedge accounting criteria reflect the risk management activities of a set of non-financial firms. I begin by partitioning a sample of firms into conventional hedgers and speculative hedgers based on a quantitative measure designed to summarize the criteria that must be met for the fair value gains and losses from a firm's derivative contracts to be recognized under the hedge accounting exception. This quantitative measure is subsequently augmented to include qualitative factors in an effort to further refine it. I then conduct a series of tests to evaluate whether the partitions exhibit characteristics associated with risk management or speculation.;I find descriptive evidence that (1) speculative hedgers are riskier than conventional hedgers; (2) there is no association between residual exposure to macroeconomic risk and total firm risk for conventional hedgers; (3) there is a positive association between residual exposure to commodities prices and total firm risk for speculative hedgers; (4) speculative hedgers operate in more opaque information environments relative to those of conventional hedgers; and, (5) speculative hedgers have more short-term shareholders. In the aggregate, these results suggest hedge accounting criteria does reflect risk management activities.