The usefulness of derivative disclosures by Chinese listed companies

Huang, Henry Zhen

Abstract

While the world has witnessed the growing use of derivative instruments and rapid expansion of derivatives markets over the past two decades, the extensive use of derivatives in developed markets, particularly of mortgage-related derivative products has been blamed for the recent global financial crisis. The supervisory bodies across the world have increasingly paid attention to the establishment of an effective governance system including the issuing of financial reporting rules for companies to disclose their derivative activities. By far derivatives research has predominately been based on western developed economies; little has been known about reporting and disclosing of derivatives from developing economies. The motivation of this study is to fill the research gap with the primary aim to assessing the usefulness of derivative related disclosures in China - the largest developing economy in the world.
The study is divided into two major stages. The first stage mainly intends to reveal the degree of derivative related disclosures provided by Chinese listed companies. Annual reports of 53 Chinese listed firms are considered as the sampling unit for observation and analysis. Using the content analysis approach this study compares the derivative related information disclosed in companies' annual reports with the developed disclosure index that is largely based upon IFRS and lAS provisions. The study has found: First, the level of the compliance with IFRS and lAS derivative regulations by Chinese quoted companies is generally low. Second, Chinese listed companies are likely to prefer the use of equity derivative products rather than other types of derivatives. Third, the corporate size seems not to significantly affect the amount of derivative related disclosures by Chinese quoted companies. Fourth, the amount of derivative disclosures about the significance of using derivatives for the company's financial position and performance is significantly greater than that of information in relation to potential risks arising from the use of derivative instruments.
The second phase primarily intends to examine the usefulness of derivative disclosures perceived by equity market participants. The study conducted in-depth interviews with 21 institutional investors including 10 investment managers and 11 professional analysts. The key findings include: First, the disclosed information about the use of derivative instruments by quoted firms is perceived to be useful and helpful in facilitating investment decisions. Second, the information related to the use of derivatives is generally thought to play a minor role in facilitating investment decisions. Third, the current provisions of derivative related information by Chinese quoted entities are generally unsatisfied by most of institutional investors. Fourth, the current accounting and reporting policies imposed by regulators seem to be very difficult for Chinese investors to understand.
The study, the first study of its kind, contributes to the understanding of the current status and usefulness of derivative related disclosures in China. It also provides the valuable insight to the development of derivative reporting standards by offering some policy implications particularly to developing economies.

Citation

Huang, H. Z. The usefulness of derivative disclosures by Chinese listed companies. (Thesis). Edinburgh Napier University. Retrieved from http://researchrepository.napier.ac.uk/id/eprint/6656

• Thesis Type: Thesis
• Deposit Date: Mar 25, 2014
• Peer Reviewed: Not Peer Reviewed
• Keywords: Derivatives; Chinese listed companies; disclosure; reporting standards
• Public URL: http://researchrepository.napier.ac.uk/id/eprint/6656
• Award Date: 2012-03