Corporate Risk-management Behavior and Earnings Management: Evidence from firms Using Derivatives

This study investigates the effect of corporate risk-management behavior through derivatives usage on earnings management. Firms take either a risk-taking position or a risk-averse position, and they use derivatives to control their business risks based on their corporate risk-management behavior. We question whether corporate risk-management behavior affects the firm’s decision-making such as earnings management. In this study, corporate risk-management behavior is measured by the methodology detailed in Zhang’s (2009) paper. Using 3,645 Korean firm data from 2001 to 2012, we find that the firms with risk-taking position through derivatives are more likely to involve earnings management. The empirical results support the argument that firms manage their earnings by veiling their risk-taking activities. We believe that this study contributes to the accounting literature by identifying the relationship between the firm’s risk-taking activities. Also, our comprehensive results provide insight into earnings management which can be employed to hide the firm's risk-taking activities.