Methodology Chapter: Perception and Performance: What Derivatives Hedging

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Investors Perceptions of Derivatives Strategy

The proposed research will explore the perceptions of investors toward the use of derivatives and their assessment of managers who employ the use of derivatives. The review of the literature on how investors perceive derivatives provided a broad swath of research and an international perspective. The area of behavioral finance is of particular relevance to the proposed research, as several investigators have suggested. The matter of asymmetrical information -- a classic consideration in investment -- emerged in a somewhat distinct form in the literature review. The knowledge level that investors have regarding derivatives appeared to play an important part in how managers who use derivatives are perceived, in investors' perceptions of the investment strategy, and in the ability of market participants to generate accurate and complete earnings forecasts. The range of literature reviewed offered insights into many different facets of the role of derivatives and the manner in which participants in the market act on derivatives usage.

A review of the literature revealed that substantive differences exist in the perceptions of investors and asset managers toward derivatives as an investment strategy. The disparate research findings across studies in different countries is a clear indication that research findings must be presented against the backdrop of their dominant sociological and cultural aspects of the research context. As we have seen, French investors don't necessarily respond the same as Chinese investors, and neither appears to exhibit risk behaviors identical to American investors. This clear disparity suggests that the proposed research must do one of two things: 1) systematically conduct research in one or more countries in order to make comparisons, or 2) restrict the research to a particular nation or region. This researcher choses the latter, and will develop a sample frame that draws subjects only from [insert country name].

Research Plan

This research is grounded in the positivism philosophy for which highly structured methodology is employed to enable generalization and quantifiable observations and the evaluation of results with the use of statistical methods (Saundars, 2003). Against the positivism background, this study will employ quantitative methods to collect and analyze data (Saundars, 2003). Accordingly, this author will play the role of an objective analyst in order to evaluate the collected data and produce an appropriate result that achieves the research aims and objectives (Saundars, 2003). The research objective of this study is to specifically examine the perceptions of investors toward use of derivatives and their assessment of managers who employ the use of derivatives.

The research takes a deductive approach in which the reasoning progresses from general theories to specific instances.

Zheng, et al. (2011) studied the attribution of value to the use of derivatives by investors. Their research suggested that gaps in financial knowledge contributed to investors' low value of derivatives and further study could examine the relation between asset managers' explanations about the purpose and value of derivatives hedging to investors and the investors' perceptions about hedging before and after the provision of investment education.

Research conducted by Reynolds-Moehrle (2005) shed light on the effect that managerial disclosure has on investors' reactions to earnings information, using empirical procedures to compare forecast revision behavior, earnings predictability, and earnings response coefficients before and after disclosure of sustained hedging activity. Their findings suggest future research to examine variation in the duration and frequency of disclosures provided during set periods.

Research Problem and Research Questions

The problem under consideration in this study is whether the provision of education to asset managers and investors about derivative hedging will contribute to improved justification and use of the strategy by asset managers, and to increased acceptance of and comfort with the strategy by investors. Accordingly, the following research questions have emerged from a review of the literature:

Research Question #1: To what extent does the knowledge level of investors influence their perceptions of derivatives as an investment strategy?

Research Question #2: To what extent does the knowledge level of investors influence the perceptions of asset managers' use of derivatives as an investment strategy?

Research Question #3: To what extent does the frequency of managerial disclosure influence the perceptions of investors about the use of derivatives?

Research Question #4: To what extent does the length of time and the frequency of managerial disclosures influence the reactions of investors to earnings surprises?

Of these research questions, two key ideas are salient: How are investors influenced by managerial expertise in derivatives hedging? And how do investors respond to earnings variation when asset managers… [END OF PREVIEW]

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Perception and Performance: What Derivatives Hedging.  (2014, April 25).  Retrieved March 26, 2019, from https://www.essaytown.com/subjects/paper/perception-performance-derivatives/8367429

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"Perception and Performance: What Derivatives Hedging."  Essaytown.com.  April 25, 2014.  Accessed March 26, 2019.
https://www.essaytown.com/subjects/paper/perception-performance-derivatives/8367429.