The Effect of Mandated Market Risk Disclosures on Trading Volume Sensitivity to Interest Rate, Exchange Rate, and Commodity Price Movements

Posted: 26 Nov 2001

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

Abstract

We hypothesize that firms' 10-K market risk disclosures, recently mandated by SEC Financial Reporting Release No. 48 (FRR 48), reduce investors' uncertainty and diversity of opinion about the implications, for firm value, of changes in interest rates, foreign currency exchange rates, and commodity prices. We argue that this reduced uncertainty and diversity of opinion should dampen trading volume sensitivity to changes in these underlying market rates or prices. Consistent with this hypothesis, we find that after firms disclose FRR 48-mandated information about their exposures to interest rates, foreign currency exchange rates, and energy prices, trading volume sensitivity to changes in these underlying market rates and prices declines, even after controlling for other factors associated with trading volume. The observed declines in trading volume sensitivity are consistent with FRR 48 market risk disclosures providing useful information to investors.

Keywords: Disclosure regulation; Market risk disclosures; Derivatives; Trading volume; Investors' uncertainty; Diversity of opinion

JEL Classification: M41, M45, G18

Suggested Citation

Linsmeier, Thomas J. and Thornton, Daniel B. and Venkatachalam, Mohan and Welker, Michael, The Effect of Mandated Market Risk Disclosures on Trading Volume Sensitivity to Interest Rate, Exchange Rate, and Commodity Price Movements. The Accounting Review, Forthcoming, April, 2002. Available at SSRN: https://ssrn.com/abstract=288220

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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