The usefulness of derivative disclosures for investment decision-making. Perceptions of Chinese institutional investors
| Published date | 06 October 2014 |
| DOI | https://doi.org/10.1108/JCEFTS-02-2015-0009 |
| Date | 06 October 2014 |
| Pages | 173-192 |
| Author | Zhen Huang,Simon Gao |
| Subject Matter | Economics,International economics |
INVITED PAPER
The usefulness of derivative
disclosures for investment
decision-making
Perceptions of Chinese institutional investors
Zhen Huang
Edinburgh Napier University, Edinburgh, UK, and
Simon Gao
Edinburgh Napier University, Edinburgh, UK and
The ESC Rennes School of Business, Rennes, France
Abstract
Purpose – The purpose of this study is to examine the usefulness of derivative disclosures from the
perspective of Chinese institutional investors in relation to their investment decision-making.
Design/methodology/approach – This study uses semi-structured interviews with 21 institutional
investors based in China including 10 funds managers and 11 professional analysts.
Findings – This study nds that the information on the use of derivatives disclosed by listed
companies in China is generally perceived to be useful to Chinese institutional investors (e.g. funds
managers and professional analysts) in facilitating their investment decisions, although such
information is generally thought to be less signicant compared to other fundamental nancial
information such as assets, liabilities and prots/losses. It also nds that the current provisions of
derivatives-related information by Chinese listed companies are largely unsatised primarily because
of insufcient information and the lack of timely disclosures. Furthermore, it nds that the accounting
and reporting policies currently imposed in China appear to be little understood by Chinese investors.
Research limitations/implications – This study has its own limitations due to the approach of
interviews with a relatively small sample from only two investment rms in China.
Practical implications – The ndings from the study provide a number of policy implications for
derivatives regulators and accounting standards setters.
Originality/value – This study is the rst study of its kind to investigate the perceptions of Chinese
institutional investors on the usefulness of derivatives reporting and disclosures with the use of
interview research method.
Keywords Derivatives, Accounting standards, Derivative disclosures
Paper type Research paper
1. Introduction
A derivative instrument is:
[…] a contract between two parties that species conditions – in particular, dates and the
resulting values of underlying variables – under which payments, or payoffs, are to be made
between the parties (Rubinstain, 1999,p.1).
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Investment
decision- making
173
Journal of Chinese Economic and
Foreign Trade Studies
Vol. 7 No. 3, 2014
pp. 173-192
© Emerald Group Publishing Limited
1754-4408
DOI 10.1108/JCEFTS-02-2015-0009
In the business word, the forward contracts, futures, options and swaps are the typical
products traded in the derivatives markets. The derivative instruments were rst
invented in the 1970s, and since then, the use of derivatives had grown signicantly in
developed economies prior to the 2007/2008 global nancial crisis.
Since the 1990s, there has been a rising debate over the benets and risks associated
with the use of derivatives. Supporters believe that derivatives are powerful in
managing companies’ exposures. In contrast, critics describe derivative products as
“double-edged swords” that are extremely useful for risk management, but they also
create a host of new risks that expose the entire economy to potential nancial market
disruptions (Berry, 2003). The usefulness of derivatives and related derivative
disclosures has, therefore, attracted considerable academic interests. Prior studies were
mostly based upon the samples and cases from developed countries where nancial
derivative markets were relatively well-developed. In particular, most of the prior
studies on derivatives and derivative disclosures were based on the US setting under the
US regulatory regime and accounting standards.
Despite China’s rapid economic growth over the past three decades, its derivatives
market is still in the early development with less investment choices available. The
evolution of the Chinese derivatives market was circuitous in history. There were only
three commodity futures exchanges operated in China for almost ten years since the
central government closed out all nancial derivatives markets in 1995[1](Huang and
Gao, 2008). China has begun to progressively develop its derivatives market by
re-establishing the nancial derivatives market since 2005. The resume of warrants
trading (especially the re-opening of the nancial derivatives market in 2006) is a
remarkable progress in the evolution of China’s derivatives market. The central
government has been very cautious about new nancial products because of the concern
that they might be misused or abused by investors. Hence, there are just two nancial
derivative contracts – Chinese Stock Index 300 index futures and ve-year treasury
bond futures – available to be traded at present.
In China, the accounting and reporting practice for the use of derivatives was largely
absent in a long period, and prior to 2005, the disclosure of derivative activities was
mainly voluntarily provided by companies (Huang and Gao, 2008). The situation has
been gradually improved since 2005 when the Chinese authority gathered pace in
integrating its accounting and reporting standards with the international nancial
reporting standards (IFRS). The release of the “New Accounting Standards” in 2006 was
an era in the development of derivatives-related disclosures in China, as it was fully
converged with the IFRS for the use of derivatives, which symbolized that the disclosure
of derivatives-related activities in China was shifting from a voluntary to mandatory
basis.
This study aims to examine the usefulness of derivative disclosures from the
perspective of institutional investors in China in relation to their investment
decision-making. To achieve the overall aim, the study especially addresses three
research questions as follows:
RQ1. What is the response of China’s institutional investors to derivatives-related
disclosures?
RQ2. Do institutional investors consider disclosing more derivatives activities to be
useful to them in making investment decisions?
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