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Pricing and Mispricing Effects of SFAS 131

Authors

  • Ole-Kristian Hope,

    1. The first author is from Rotman School of Management, University of Toronto. The second author is from Barry Kaye College of Business, Florida Atlantic University. The third author is from Michael F. Price College of Business University of Oklahoma and the fourth author is from London Business School.
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  • Tony Kang,

    1. The first author is from Rotman School of Management, University of Toronto. The second author is from Barry Kaye College of Business, Florida Atlantic University. The third author is from Michael F. Price College of Business University of Oklahoma and the fourth author is from London Business School.
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  • Wayne B. Thomas,

    1. The first author is from Rotman School of Management, University of Toronto. The second author is from Barry Kaye College of Business, Florida Atlantic University. The third author is from Michael F. Price College of Business University of Oklahoma and the fourth author is from London Business School.
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  • Florin Vasvari

    Corresponding author
    1. The first author is from Rotman School of Management, University of Toronto. The second author is from Barry Kaye College of Business, Florida Atlantic University. The third author is from Michael F. Price College of Business University of Oklahoma and the fourth author is from London Business School.
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  • 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.

* Address for correspondence: Ole-Kristian Hope, Rotman School of Management, University of Toronto, Toronto, Canada.
e-mail: okhope@rotman.utoronto.ca

Abstract

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.

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