Hedge Accounting Disclosures and Financial Stability: Evidence from Listed Deposit Money Banks in Nigeria
Abstract
The increasing volatility in Nigeria’s financial environment has heightened concerns about the stability of deposit money banks and the effectiveness of their risk management practices. Hedge disclosures have emerged as a critical mechanism for enhancing transparency, improving market discipline, and mitigating financial risks in the banking sector. This study examined the effect of hedge disclosures on the financial stability of deposit money banks in Nigeria, with specific focus on commodity hedge disclosure, interest rate hedge disclosure, and foreign exchange rate hedge disclosure. Financial stability is proxied using the Z-score. The study adopted an ex-post facto research design and utilized panel data obtained from the annual reports of thirteen (13) listed deposit money banks over an eleven-year period (2014–2024). Data were analyzed using descriptive statistics and panel regression techniques. Preliminary diagnostic tests, including panel unit root and Hausman tests, were conducted to ensure the validity of the model, and the Random Effects Model was selected as the most appropriate estimation technique. The findings revealed that commodity hedge disclosure has a negative and statistically significant effect on financial stability (β = -29.30522, p = 0.0008), indicating that increased disclosure of commodity hedging activities is associated with reduced bank stability. Similarly, interest rate hedge disclosure exhibited a strong negative and significant effect on financial stability (β = -70.45421, p = 0.0000), suggesting that interest rate hedging may increase financial vulnerability. In contrast, foreign exchange rate hedge disclosure showed a positive and statistically significant effect on financial stability (β = 13.64102, p = 0.0369), implying that effective management and disclosure of foreign exchange risks enhance bank resilience. The study concluded that the impact of hedge disclosures on financial stability is heterogeneous and depends on the nature of the risk being hedged. The study recommended that the Nigerian financial system should promote the development of more robust and liquid derivative markets, strengthen regulatory oversight, and encourage efficient hedging practices to enhance financial stability.