Do Risk Disclosures Matter When it Counts? Evidence from the Swiss Franc Shock
55 Pages Posted: 25 Mar 2017 Last revised: 12 Oct 2020
Date Written: October 8, 2020
We examine the relation between disclosure quality and information asymmetry among market participants following an exogenous shock to macroeconomic risk. In 2015 the Swiss National Bank abruptly announced that it would abandon the longstanding minimum euro-Swiss franc exchange rate. We find evidence suggesting that firms with more transparent disclosures regarding their foreign exchange risk exposure ex ante exhibit significantly lower information asymmetry ex post. The information gap in bid-ask spreads appears within 30 minutes of the announcement and persists for two weeks, during which new information gradually substitutes for past disclosures. We validate the information dynamics of past risk disclosures with three field surveys: (1) Sell-side analysts emphasize the importance of existing (risk) disclosures in evaluating the translational and transactional effects of the currency shock. (2) Lending banks’ credit officers rely on past disclosures as the primary information source available for smaller (unlisted) firms in the immediate aftermath of the shock. (3) Investor-relations managers use existing financial filings as a key resource when communicating with external stakeholders. The results suggest that historical disclosures help investors attenuate information asymmetry in light of unexpected news.
Keywords: Risk disclosures, adverse selection, liquidity, information asymmetry, currency risk, archival studies, surveys
JEL Classification: F31, G12, G14, G15, G30, M41
Suggested Citation: Suggested Citation