Effects of Fair Value Reporting of Derivatives on Liquidity Management Policies and Firm Value: Evidence From SFAS No. 133

I examine the effects of fair value reporting of derivatives, in accordance with SFAS No. 133, on corporate risk management policies and firm value. Prior studies predict that effective risk management through derivatives use reduces demand for liquidity and increases debt capacity. Using difference-in-differences analyses, I find that firms that are affected by SFAS No. 133 reduced cash holdings. In addition, treatment firms increased leverage but did not experience increased cost of debt or lower credit ratings. These results are consistent with the proposition that SFAS No. 133 encouraged firms to engage in more prudent risk management using derivatives. Finally, the value of firms that are affected by SFAS No. 133 increased. The results overall suggest that fair value reporting of derivatives had significant effects on corporate risk management policies and firm value.