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Pricing and Mispricing Effects of SFAS 131

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  • Ole‐Kristian Hope
  • Tony Kang
  • Wayne B. Thomas
  • Florin Vasvari

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.

Suggested Citation

  • Ole‐Kristian Hope & Tony Kang & Wayne B. Thomas & Florin Vasvari, 2008. "Pricing and Mispricing Effects of SFAS 131," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 35(3‐4), pages 281-306, April.
    • Handle: RePEc:bla:jbfnac:v:35:y:2008:i:3-4:p:281-306
    DOI: 10.1111/j.1468-5957.2007.02071.x
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    3. Cereola, Sandra J. & Nichols, Nancy B. & Street, Donna L., 2017. "Geographic segment disclosures under IFRS 8: Changes in materiality and fineness by European, Australian and New Zealand blue chip companies," Research in Accounting Regulation, Elsevier, vol. 29(2), pages 119-128.
    4. Hong, Weiting, 2022. "Trade momentum for alpha," Finance Research Letters, Elsevier, vol. 50(C).
    5. Rucsandra Moldovan, 2014. "Post-Implementation Reviews for IASB and FASB Standards: A Comparison of the Process and Findings for the Operating Segments Standards," Accounting in Europe, Taylor & Francis Journals, vol. 11(1), pages 113-137, June.
    6. Venter, Elmar R. & Cahan, Steven F. & Emanuel, David, 2013. "Mandatory Earnings Disaggregation and the Persistence and Pricing of Earnings Components," The International Journal of Accounting, Elsevier, vol. 48(1), pages 26-53.

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