The Effect of Mandatory Disclosure on Market Inefficiencies: Evidence from FASB Statement No. 161

51 Pages Posted: 15 Sep 2017 Last revised: 2 Jul 2020

See all articles by John L. Campbell

John L. Campbell

University of Georgia - J.M. Tull School of Accounting

Urooj Khan

Columbia Business School - Accounting, Business Law & Taxation

Spencer Pierce

Florida State University - College of Business

Date Written: March 18, 2020

Abstract

Prior research finds that unrealized gains/losses on cash flow hedges are negatively associated with future earnings, and that investors and analysts fail to anticipate this association. These studies speculate that this mispricing is due to either poor derivatives disclosures or the accounting model for cash flow hedges. We examine whether enhanced mandatory derivatives disclosures set forth in FAS 161 improve users’ understanding of firms’ hedging activities and offer three main findings. First, we find that this mispricing does not persist after FAS 161. Second, we find that the correction of mispricing is greatest when disclosure might help investors most. Finally, we find that analyst forecast accuracy improves after FAS 161. Overall, our results suggest that the enhanced mandatory derivative disclosures required by FAS 161 improved users’ understanding of the effects of derivative and hedging activities on future firm performance and firm value – and consequently mitigated investor mispricing.

Keywords: Derivatives; Mandatory Disclosure; Market Inefficiency; Effectiveness of Regulation

Suggested Citation

Campbell, John L. and Khan, Urooj and Pierce, Spencer, The Effect of Mandatory Disclosure on Market Inefficiencies: Evidence from FASB Statement No. 161 (March 18, 2020). The Accounting Review, (doi.org/10.2308/TAR-2018-0418) Forthcoming, Columbia Business School Research Paper No. 17-94, 29th Annual Conference on Financial Economics & Accounting 2018, Available at SSRN: https://ssrn.com/abstract=3035887 or http://dx.doi.org/10.2139/ssrn.3035887

John L. Campbell (Contact Author)

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States
706.542.3595 (Phone)
706.542.3630 (Fax)

Urooj Khan

Columbia Business School - Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

Spencer Pierce

Florida State University - College of Business ( email )

423 Rovetta Business Building
Tallahassee, FL 32306-1110
United States

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