The impact of the adoption of hedge accounting rules on enterprise risk management adoption practices by multinationals

Document description

We predict that adoption of Enterprise Risk Management (ERM) by multinational non-financial firms is inter-related with both firm hedge accounting policies and choices about whether to adopt US GAAP or IFRS (‘GAAP quality’). We hypothesize that sources of both market risk and idiosyncratic risk mitigate the ability of ERM-adopting firms to produce greater risk reduction. Therefore, we predict that sources of firm specific risk, such as pension risk, and hedge accounting policies, as well as GAAP quality, interact with ERM to affect incentives facing multinational firms to reduce their risk. Consistent with this hypothesis, we find that firms adopting ERM experience a reduction in stock return volatility but only for the period following implementation. Our results also find that income smoothing; GAAP choice and geographical complexity mitigate the effect of ERM adoption on risk and return volatility for ERM-adopting firms.

Keywords: Enterprise Risk Management, Derivative exposure, multinationals

JEL Classification: M40

ERM, hedging instruments, risk, volatility