We thank Andrew Stark (editor) and an anonymous referee for very useful comments and suggestions. Hope gratefully acknowledges the financial support of the Deloitte Professorship and the Social Sciences and Humanities Research Council of Canada.
Pricing and Mispricing Effects of SFAS 131
Article first published online: 12 FEB 2008
© 2008 The Authors Journal compilation © 2008 Blackwell Publishing Ltd
Journal of Business Finance & Accounting
Volume 35, Issue 3-4, pages 281–306, April/May 2008
How to Cite
Hope, O.-K., Kang, T., Thomas, W. B. and Vasvari, F. (2008), Pricing and Mispricing Effects of SFAS 131. Journal of Business Finance & Accounting, 35: 281–306. doi: 10.1111/j.1468-5957.2007.02071.x
- Issue published online: 12 FEB 2008
- Article first published online: 12 FEB 2008
- (Paper received July 2006, revised version accepted July 2007)
- SFAS 131;
- segment discloure;
- foreign earnings;
Abstract: We investigate the effects of the introduction of Statement of Financial Accounting Standards No. 131 (SFAS 131) on the market's valuation of foreign earnings. Thomas (1999) documents that investors discount the value of foreign earnings for US multinational companies. He conjectures but does not test the possibility that this finding is due to poor disclosure related to foreign operations. We find strong evidence that the introduction of the standard is positively associated with the pricing of foreign earnings. In addition, we use both the Mishkin (1983) test and a zero-investment hedge portfolio test and find that investors' mispricing of foreign earnings lessens (and in fact disappears) after SFAS 131. This study is one of the first attempts to show that improved disclosure reduces mispricing.