Pricing and Mispricing Effects of SFAS 131

Journal of Business Finance and Accounting, 2008

Posted: 15 Feb 2008

See all articles by Ole-Kristian Hope

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Wayne B. Thomas

University of Oklahoma

Tony Kang

University of Nebraska - Lincoln

Florin P. Vasvari

London Business School

Multiple version iconThere are 2 versions of this paper

Abstract

We investigate the effects of the introduction of Statement of Financial Accounting Standards No. 131 (SFAS 131) on the market's valuation of foreign earnings. Thomas (1999) documents that investors discount the value of foreign earnings for U.S. multinational companies. He conjectures but does not test the possibility that this finding is due to poor disclosure related to foreign operations. We find strong evidence that the introduction of the standard is positively associated with the pricing of foreign earnings. In addition, we use both the Mishkin (1983) test and a zero-investment hedge portfolio test and find that investors' mispricing of foreign earnings lessens (and in fact disappears) after SFAS 131. This study is one of the first attempts to show that improved disclosure reduces mispricing.

Keywords: Segment disclosure, SFAS 131 foreign earnings, valuation, mispricing

JEL Classification: M41, M44, M45, M47, G12, G14

Suggested Citation

Hope, Ole-Kristian and Thomas, Wayne B. and Kang, Tony and Vasvari, Florin P., Pricing and Mispricing Effects of SFAS 131. Journal of Business Finance and Accounting, 2008, Available at SSRN: https://ssrn.com/abstract=1092475

Ole-Kristian Hope (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

HOME PAGE: http://www.rotman.utoronto.ca/FacultyAndResearch/Faculty/FacultyBios/Hope.aspx

Wayne B. Thomas

University of Oklahoma ( email )

Michael F. Price College of Business,
307 W Brooks, Rm 212B
Norman, OK 73019
United States
405-325-5789 (Phone)
405-325-7348 (Fax)

Tony Kang

University of Nebraska - Lincoln ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Florin P. Vasvari

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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