Do sophisticated investors use the information provided
by the fair value of cash ﬂow hedges?
John L. Campbell
Jimmy F. Downes
William C. Schwartz Jr.
Published online: 6 March 2015
Ó Springer Science+Business Media New York 2015
Abstract An unrealized gain on a cash ﬂow hedge implies that the price of the
underlying hedged item (i.e., commodity price, foreign currency exchange rate, or
interest rate) moved in a direction that will negatively affect the ﬁrm’s proﬁts after
the hedge expires. Prior research shows that unrealized gains/losses on cash ﬂow
hedges are negatively associated with future earnings and that investors’ expecta-
tions, as reﬂected in stock prices, do not appear to anticipate this association. We
provide further evidence on this mispricing by examining whether ﬁnancial analysts
understand the future earnings effects of cash ﬂow hedges. We ﬁnd three main
results: (1) analysts do not correctly incorporate unrealized cash ﬂow hedging gains
and losses into their 2- and 3-year-ahead earnings forecasts, (2) analysts correct
their errors after the hedges have largely expired and investors correct their
We appreciate helpful comments and suggestions from an anonymous reviewer, Ben Ayers, Linda
Bamber, Andy Call, Patricia Dechow, Dan Dhaliwal, Jere Francis, Lisa Hinson, Kelly Huang, Tony
Kang, Lian Fen Lee, Sandeep Nabar, Santhosh Ramalingegowda, Bob Resutek, Ben Whipple, and
workshop participants at Oklahoma State University and the 2012 American Accounting Association
(AAA) Annual Meeting.
J. L. Campbell (&)
J.M. Tull School of Accounting, Terry College of Business, University of Georgia, Athens,
GA 30602-6252, USA
J. F. Downes
School of Accountancy, College of Business Administration, University of Nebraska-Lincoln,
Lincoln, NE 68588-0488, USA
W. C. Schwartz Jr.
Department of Accounting, Spears College of Business, Oklahoma State University, Stillwater,
OK 74078-4011, USA
Rev Account Stud (2015) 20:934–975