The Usefulness of Derivative-related Accounting Disclosures

The Financial Accounting Standards Board attempts to improve reporting and disclosure of derivative transactions through SFAS Nos. 105, 107, and 119. These statements require recognition of gains or losses on trading purpose derivatives, and disclosure of notional principal amounts, credit exposures, and fair values of trading and nontrading derivatives. Using a multiple regression model, this study investigates the relevance of these disclosures to stock returns for a sample of large banks. All derivatives-related disclosures, except for notional principal amounts, are found to contain new information not incorporated in market beta and earnings. These results support the Board's derivative disclosure requirements.