Risk management and the effects of CVM instruction 550: empirical analysis

Abstract

The present study examines the effect of CVM normative instruction 550 on the use of derivatives and, consequently, on the risk management of Brazilian companies. The instruction requires companies to disclose the fair value of derivative instruments in their quarterly financial statements. However, this resolution does not establish on the accounting treatment for these types of instruments. Thus, it is supposed that the rule should affect both groups of derivatives users, hedgers (EH) and speculators (IS). The empirical results show that the risk the companies incur basically refers to the interest rate and exchange rate. After the adoption of the instruction, statistical evidence was found that shows a decrease in derivative use for both groups. The evidence suggests that instruction 550 has encouraged companies to use derivatives contracts with more prudence, which may suggest a change in risk management behavior. For this study, a sample of 107 Brazilian companies was used, belonging to 10 ICB economic sectors, during a ten-year period (1999 to 2009).