Do Risk Disclosures Matter When it Counts? Evidence from the Swiss Franc Shock

55 Pages Posted: 25 Mar 2017 Last revised: 12 Oct 2020

See all articles by Luzi Hail

Luzi Hail

University of Pennsylvania - The Wharton School; European Corporate Governance Institute (ECGI)

Maximilian Muhn

University of Chicago - Booth School of Business

David Oesch

University of Zurich

Date Written: October 8, 2020

Abstract

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

Hail, Luzi and Muhn, Maximilian and Oesch, David, Do Risk Disclosures Matter When it Counts? Evidence from the Swiss Franc Shock (October 8, 2020). Jacobs Levy Equity Management Center for Quantitative Financial Research Paper, Available at SSRN: https://ssrn.com/abstract=2939935 or http://dx.doi.org/10.2139/ssrn.2939935

Luzi Hail (Contact Author)

University of Pennsylvania - The Wharton School ( email )

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European Corporate Governance Institute (ECGI) ( email )

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Belgium

Maximilian Muhn

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

David Oesch

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

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