Improving Financial Statement Footnotes: Evidence from Derivative and Hedging Disclosures
56 Pages Posted: 1 Mar 2016 Last revised: 13 Mar 2019
Date Written: March 7, 2019
Motivated by accounting standard setters’ and researchers’ interest in disclosure effectiveness, I investigate the impact of required changes in the content and format of derivative and hedging footnote disclosures caused by SFAS 161. Using a difference-in-differences design, I investigate (1) whether these mandatory disclosure changes affect investor understanding, and (2) which disclosure changes (content vs. format) matter most. I employ textual analysis to quantify these disclosure changes and find that bid-ask spreads are reduced for firms whose disclosures changed more after adopting SFAS 161. However, these same firms do not exhibit reduced return volatility. These findings suggest that the required disclosure changes improved understanding by reducing information asymmetry rather than by reducing uncertainty about firm value. Finally, I show that increased qualitative and more disaggregated quantitative information (i.e., disclosure content) matter more for investor understanding than improved disclosure grouping and tabular display (i.e., disclosure format).
Keywords: disclosure, footnotes, information uncertainty, derivatives, hedging
JEL Classification: M41,G32,M48
Suggested Citation: Suggested Citation