Do Sec Disclosures Reduce Investors' Disagreements About Firms' Exposures to Market Risk?: A Trading Volume Analysis

40 Pages Posted: 16 Oct 2000

See all articles by Thomas J. Linsmeier

Thomas J. Linsmeier

Financial Accounting Standards Board

Daniel B. Thornton

Smith School of Business at Queen's University

Mohan Venkatachalam

Duke University - Fuqua School of Business

Michael Welker

Queen's University - Queen's School of Business

Date Written: July 2000

Abstract

This paper uses a trading volume analysis to examine the extent to which SEC-mandated disclosures make firms' market risk exposures more transparent to investors. We hypothesize that if the SEC's quantitative market risk disclosures reduce investor disagreements about firms' risk exposures, trading volume associated with market rate or price changes should decline after the disclosures are made public. We test for this relationship across three samples of firms that provide the mandated market risk disclosures for the first time in their 10-K reports. We find that the trading volume associated with changes in market rates or prices consistently declines after the 10-K filing for firms exposed to changes in interest rates and foreign currency exchange rates. In contrast, for firms exposed to commodity price changes, we find limited evidence of a decline in trading volume associated with changes in energy commodity prices, and no evidence of a decline in trading volume associated with changes in non-energy commodity prices. We explore several explanations for the weaker commodity price results, some relating to potential deficiencies in the reported commodity information and others to research design issues. In general, we interpret the results as providing evidence suggesting that the SEC's quantitative market risk disclosures reduce investor disagreements about firms' exposures to market risks.

JEL Classification: M41, G14, G38

Suggested Citation

Linsmeier, Thomas J. and Thornton, Daniel B. and Venkatachalam, Mohan and Welker, Michael, Do Sec Disclosures Reduce Investors' Disagreements About Firms' Exposures to Market Risk?: A Trading Volume Analysis (July 2000). Available at SSRN: https://ssrn.com/abstract=240273 or http://dx.doi.org/10.2139/ssrn.240273

Thomas J. Linsmeier

Financial Accounting Standards Board ( email )

401 Merritt 7
P.O. Box 5116
Norwalk, CT 06856-5116
United States
203-956-5208 (Phone)
203-847-6030 (Fax)

Daniel B. Thornton

Smith School of Business at Queen's University ( email )

143 Union Street, #358
Kingston, Ontario K7L 3N6
Canada
613-328-5213 (Phone)
613-533-2321 (Fax)

HOME PAGE: http://smith.queensu.ca

Mohan Venkatachalam

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7859 (Phone)
919-660-7971 (Fax)

Michael Welker (Contact Author)

Queen's University - Queen's School of Business ( email )

Kingston
Ontario, Ontario K7L 3N6
Canada

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