One is tempted to argue that accounting earnings matter to managers because of their relevance to analysts’ perceptions and predictions of future earnings and because of their relevance in management compensation. Both arguments are less relevant for smaller companies that are typically more often closely held and hence should have less incentive to focus on earnings. However, from Table 2 we can infer that smaller companies stress accounting earnings more often as a hedging goal than larger companies.
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Why is there this striking difference in the relevance of accounting earnings between the US and Germany? This question is easier to answer when one recognizes that accounting earnings play a more important role in the German environment. The function of accounting is not restricted to provide information7 but serves an important role in the distribution of dividends to shareholders and in taxation. There is a strong link between German financial accounting and German tax accounting. Further dividends may only be paid out of accounting earnings; if there are positive accounting earnings shareholders have a claim on dividends. As a result of those institutional features there is a strong focus on accounting earnings in all business decisions and consequently also in hedging decisions.
These results point to a different perception as to the goals of risk management: a greater focus on cash flow in the US and a greater focus on accounting earnings in Germany. However, one should be careful not to overestimate this distinction as both cash flows and accounting earnings objectives can lead to similar hedging decisions in many situations.