The Information Content of Hedge Accounting—Evidence from the European Banking Industry

Abstract

ABSTRACT This paper provides an in-depth analysis of financial information related to hedge accounting in European banks from 2005 to 2014. We show that both “as-if” earnings and “as-if” book values excluding the effects of hedge accounting are less value relevant than reported figures. This indicates that hedge accounting information is valued by the market. Further, we develop a proxy to measure whether hedge accounting is economically favorable. Only if the effects of a bank's hedge accounting are economically favorable, hedge accounting disclosures are positively associated with market values. We find cross-sectional differences when adopting hedge accounting for subsample analyses of European regions. In addition, distinguishing between troubled and non-troubled banks, the results only hold for the latter category suggesting that troubled banks suffer from biased accounting information. Our results are important for standard setters and banks when seeking to understand the capital market effects of hedge accounting and their disclosures. JEL Classifications: G21; G28; M41. Data Availability: Data are available from the public sources cited in the text.