Research On The Effect Of Derivatives Usage On Earnings Volatility Of State-owned Listed Firms

The influence of financial market on financial accounting has been the focal point in recent years.Based on Chinese current financial instruments accounting standards and Chinese state-owned non-financial listed firm-years,this paper studies the impact of financial derivatives usage on corporate earnings volatility and the mechanism through which derivatives usage influences earnings volatility.At the same time,this paper tests whether this impact would vary when there exists social connections inside directorate.This paper adopts positive research method,using hand-collected data of derivatives usage and social connections inside directorate.First,this paper examines whether derivative usage could significantly affect earnings volatility and divides derivatives into futures and non-futures to test which kind of derivative assumes greater influence.Subsequently,this paper regards cash volatility and accrual volatility as the mechanisms through which derivatives usage influences earnings volatility and examines which one is the main mediator.Finally,using similarity of CEO and outside directors in degrees of education,professional title and working experience,this paper designs index of social connections inside directorate and tests whether derivatives usage and whose impact onearnings volatility would vary when there exists social connections inside directorate.Based on the firm-years of 666 Chinese state-owned non-financial listed corporations over the period 2012-2016,the empirical results show:1.firms using derivatives enjoy a significant jump in earnings volatility;2.compared with cash flows,the main mediator through which derivatives usage affects earnings volatility is accruals;3.compared with futures derivatives,non-futures derivatives have more influence on earnings volatility;4.social connections inside directorate increase the usage of derivatives and reduces the impact of derivatives on earnings volatility.Based on aforementioned results,this paper believes that the measurement of derivatives would introduce volatility of financial market into corporations performance,which is an adverse impact,under current financial instrument accounting standards.At the same time,the existence of social connections inside directorate makes executives freer to manipulate the measurement of derivatives,which would reduce the impact of derivatives on earnings volatility.