Impact of cash flow hedge accounting on future profitability and stock returns: A cross-country comparison

This study analyzes the impact of cash flow hedges (CFH) on future profitability and stock returns using a comprehensive sample of firms from 44 countries. The analysis reveals a significant negative association between CFH and future profitability in all countries, though the strength and significance of this relationship vary, suggesting the influence of country-specific factors. To evaluate the market’s response, a three-horizon return model is employed to examine the effect of CFH on stock returns, revealing a significant positive relationship for returns one and two years ahead. Notably, the findings indicate that investors perceive gains from CFH as beneficial for current stock returns but detrimental over a two-year horizon. The results partially align with previous studies and offer additional insights into how investors may differentiate between the short- and long-term implications of CFH gains and losses. Panel regression models with country-fixed effects and clustered standard errors are applied to control for unobserved heterogeneity and improve the reliability of the estimates. Overall, the findings support the proposed hypothesis, emphasize the role of country-specific factors in shaping CFH outcomes, and contribute to a deeper understanding of the financial reporting and market implications of hedge accounting practices across international settings.