Edinburgh Napier University

  While the world has witnessed the growing use of derivative instruments and rapid
expansion of derivatives markets over the past two decades, the extensive use of
derivatives in developed markets, particularly of mortgage-related derivative products
has been blamed for the recent global financial crisis. The supervisory bodies across
the world have increasingly paid attention to the establishment of an effective
governance system including the issuing of financial reporting rules for companies to
disclose their derivative activities. By far derivativ~s research has predominately been
based on western developed economies; little has been known about reporting and
disclosing of derivatives from developing economies. The motivation of this study is
to fill the research gap with the primary aim to assessing the usefulness of derivative
related disclosures in China - the largest developing economy in the world.
The study is divided into two major stages. The first stage mainly intends to reveal the
degree of derivative related disclosures provided by Chinese listed companies. Annual
reports of 53 Chinese listed firms are considered as the sampling unit for observation
and analysis. Using the content analysis approach this study compares the derivative
related information disclosed in companies' annual reports with the developed
disclosure index that is largely based upon IFRS and lAS provisions. The study has
found: First, the level of the compliance with IFRS and lAS derivative regulations by
Chinese quoted companies is generally low. Second, Chinese listed companies are
likely to prefer the use of equity derivative products rather than other types of
derivatives. Third, the corporate size seems not to significantly affect the amount of
derivative related disclosures by Chinese quoted companies. Fourth, the amount of
derivative disclosures about the significance of using derivatives for the company's
financial position and performance is significantly greater than that of information in
relation to potential risks arising from the use of derivative instruments.
The second phase primarily intends to examine the usefulness of derivative
disClosures perceived by equity market participants. The study conducted in-depth
interviews with 21 institutional investors including 10 investment managers and 11
professional analysts. The key findings include: First, the disclosed information about
the use of derivative instruments by quoted firms is perceived to be useful and helpful
in facilitating investment decisions. Second, the information related to the use of
derivatives is generally thought to play a minor role in facilitating investment
decisions. Third, the current provisions of derivative related information by Chinese
quoted entities are generally unsatisfied by most of institutional investors. Fourth, the
current accounting and reporting policies imposed by regulators seem to be very
difficult for Chinese investors to understand.
The study, the first study of its kind, contributes to the understanding of the current
status and usefulness of derivative related disclosures in China. It also provides the
valuable insight to the development of derivative reporting standards by offering
some policy implications particularly to developing economies.