When Do Accounting Earnings Matter More than Economic Earnings? Evidence from Hedge Accounting Restatements

Abstract

This study examines behavior following a change in accounting treatment for derivative hedges due to the misapplication of hedge accounting. I examine firms faced with the following choice; one, maintain stability in economic earnings but increase the volatility of accounting earnings or two, maintain stability in accounting earnings but increase the volatility in economic earnings. I find that firms' historic abilities to meet earnings targets are positively associated with the likelihood that firms will focus on accounting earnings rather than economic earnings. Results provide evidence of a change in management behavior following a change in accounting method. © 2010 Blackwell Publishing Ltd.