Pricing and mispricing effects of SFAS 131

Journal of Business Finance and Accounting

Accounting

Journal of Business Finance and Accounting 2008 Vol 35:3-4 p 281-306

Hope O-K; Kang T; Thomas W; Vasvari F

Florin Vasvari

2008

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.

Institute of Finance and Accounting

No