Pricing and Mispricing Effects of SFAS 131 |
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| Authors: | Ole-Kristian Hope Tony Kang Wayne B. Thomas Florin Vasvari |
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| Affiliation: | 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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| 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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| Keywords: | SFAS 131 segment discloure foreign earnings valuation mispricing |
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