Pricing and Mispricing Effects of SFAS 131

26 Pages Posted: 22 Apr 2008

See all articles by Ole-Kristian Hope

Ole-Kristian Hope

University of Toronto - Rotman School of Management

Tony Kang

University of Nebraska - Lincoln

Wayne B. Thomas

University of Oklahoma

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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 US 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.

Suggested Citation

Hope, Ole-Kristian and Kang, Tony and Thomas, Wayne B., Pricing and Mispricing Effects of SFAS 131. Journal of Business Finance & Accounting, Vol. 35, Nos. 3-4, pp. 281-306, April/May 2008, Available at SSRN: https://ssrn.com/abstract=1122926 or http://dx.doi.org/10.1111/j.1468-5957.2007.02071.x

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

Tony Kang

University of Nebraska - Lincoln ( email )

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

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)

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