Hedge accounting usage and capital investment: European evidence under IFRS

We investigate the effects of hedge accounting usage on firms’ level of capital investment. Analyzing a set of 286 public firms in the European Union during the period 2016–2019, our findings are threefold. Firstly, we provide evidence that firms which apply hedge accounting under IFRS requirements increase their level of capital investment more than firms that do not exploit these accounting principles. Second, we also suggest that this link is mediated by the mitigation of earnings volatility. Lastly, we find that such a relationship is exacerbated after the IFRS 9 implementation period, consistent with the view that the newest hedge accounting rules provided by the IASB are recognized to be more effective and more beneficial for firms, compared to IAS 39. These results are robust to different measures of capital investment, alternative models’ specifications, and after correcting for potential endogeneity concerns. We contribute with the first empirical study that explores the role of hedge accounting on investment behavior under different IFRS requirements. This research is valuable for standard setters and regulators to understand how their accounting requirements may affect firms’ economic decisions. From a managerial point of view, our study offers particular insights into hedge accounting mechanisms and practical implications about the role of accounting choices in real investments’ decision-making.