Corporate incentives for hedging and hedge accounting

This article explores the information effect of financial riskmanagement. Financial hedging improves the informativeness ofcorporate earnings as a signal of management ability and projectquality by eliminating extraneous noise. Managerial and shareholderincentives regarding information transmission may differ, however,leading to conflicts regarding an optimal hedging policy. Weshow that these incentives depend on the accounting informationmade available by the firm. Under some circumstances, if hedgetransactions are not disclosed (i.e., firms report only aggregateearnings), managers hedge to achieve greater risk reductionthan they would if full disclosure were required. In these cases,it is optimal for shareholders to request only aggregate accountingreports.