An Empirical Research On The Relationship Between Derivatives And Earnings Persistence

Derivatives has aroused the concern of people around the worldsince the outbreak of "sub-prime crisis". China's derivatives market have been in rapid development and more firm increasingly use financial derivatives to hedge their performance against financial risks.MM theory indicatesunder the assumption of perfect markets, given the investment decision, the company's financing decision is irrelevant with the company's capital structure and firm value. Later scholars believe that hedge can affectthe cash flow of company and increase the sustainability of corporate earnings. A questions remains largely unexplored in prior literature:If managers have incentives to reduce earnings volatility, they improve earnings volatility through the use of derivatives? Then this paper investigates the impacts of derivatives on earnings persistence under the context of the conflicts of interest.This paper analyzes the best action of stakeholdersbecause of asymmetric information, and investigates its impact on earnings persistence. Because of the existence of asymmetric information, managers or agent will maximize their own interests as a standard action, rather than the interests of shareholders as the highest criterion. Thus the company may take more risk. The empirical research is as follows:First, I investigate the earnings persistence among 100 large corporations in Shanghai and Shenzhen Exchange over the 2007-2009 periodand find that there is no difference between derivative users and non-users.This shows the use of derivatives of the companys is relatively small. Second, Consistent with my hypothesis, results from the model suggest that firms holding derivatives portfolios with large notional amounts tend to have lower levels of earnings persistence. This indicates that managers use derivatives to increase personal wealth and utility consistent with the hypothesis of self-interest and there is serious information asymmetry which may increases the risk of firms.This paper contributes to the literaturein several ways. This paper is the first one to link derivatives with the earnings persistence. I analyse the conflicts of interest in the process of the use of derivatives from the perspective of asymmetric information and investigateits impact on corporate earnings.This is an important addition to the literarture of derivatives. In addition, this paper provides evidence on determinants of earnings persistence, and enrich the company's financial policy analysis.the choice of the company's financial policies provide the theoretical basis for analysis.