Effects of Disclosure Quality on Market Mispricing: Evidence from Derivative-Related Loss Announcements

Journal of Business Finance and Accounting, Forthcoming

44 Pages Posted: 29 May 2012

See all articles by Jaiho Chung

Jaiho Chung

Korea University Business School

Hyungseok Kim

Korea Corporate Governance Service

Woojin Kim

Seoul National University - Business School; European Corporate Governance Institute (ECGI)

Yong Keun Yoo

Korea University Business School

Multiple version iconThere are 2 versions of this paper

Date Written: May 29, 2012

Abstract

Although previous research has suggested that the level of disclosure is positively related to stock market efficiency, it remains unclear whether an increase in the level of disclosure can facilitate price discovery regardless of the quality of information provided in the disclosure. We examine stock returns around 131 derivative-related loss announcements in the Korean stock market from March 2008 to June 2009 to study how disclosure quality might affect the manner in which newly disclosed information is incorporated into stock prices. To properly price derivative-related losses, investors need to differentiate “over-hedged” firms from “non-over-hedged” firms, because only those losses in excess of offsetting gains from underlying assets denominated in a foreign currency adversely affect overall profitability. We find that investors are likely to misprice derivative-related losses in non-over-hedged firms when information on the underlying foreign currency position is unavailable around the announcement of such losses. This implies that mechanically increasing the quantity of disclosures does not necessarily facilitate a more rational equity valuation, and thus suggests that policymakers should also consider the quality of information being provided when attempting to improve capital market efficiency by mandating more disclosures.

Keywords: Disclosure Quality, Market Mispricing, Foreign Currency, Hedging

JEL Classification: G14

Suggested Citation

Chung, Jaiho and Kim, Hyungseok and Kim, Woojin and Yoo, Yong Keun, Effects of Disclosure Quality on Market Mispricing: Evidence from Derivative-Related Loss Announcements (May 29, 2012). Journal of Business Finance and Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2069859

Jaiho Chung

Korea University Business School ( email )

Anam-Dong, Seongbuk-Gu
Seoul 136-701, 136701
Korea

Hyungseok Kim (Contact Author)

Korea Corporate Governance Service ( email )

76, Yeouinaru-ro, Yeongdeungpo-gu
Seoul, 150-977
Korea, Republic of (South Korea)
+82-2-3775-3781 (Phone)
+82-2-3775-2630 (Fax)

Woojin Kim

Seoul National University - Business School ( email )

1 Gwanak-ro, Gwanak-gu
Seoul, 08826
Korea, Republic of (South Korea)
82-2-880-5831 (Phone)

HOME PAGE: http://cba.snu.ac.kr/en/faculty?mode=view&memberidx=60582&major=6

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Yong Keun Yoo

Korea University Business School ( email )

1 Anam-dong 5 ka
Seoul, 136-701
Korea, Republic of (South Korea)

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