Derivatives Disclosures and Stock Price Informativeness

This study examines the effect of SFAS 161, Disclosures about Derivative Instruments and Hedging Activities, on stock price informativeness. FASB issued SFAS 161, effective in 2008, to provide investors with an enhanced understanding of the objectives and implications of firms’ use of derivatives and hedging activities. Our primary goal is to examine whether SFAS 161 facilitates the dissemination of firm-specific information to the market and thus increases stock price informativeness. Using a U.S. sample covering fiscal-years 2001–2018, this study employs a difference-in-difference research design and identifies the treatment group (derivatives users) by conducting a textual analysis of the firm’s derivatives disclosures in the 10-K reports. The results show that for firms that engage in derivatives activities, stock price informativeness increases after the adoption of SFAS 161. We further find that the positive association between SFAS 161 adoption and stock price informativeness is more pronounced for firms with more readable derivatives disclosures. The results suggest that enhanced readability in derivative disclosures play an important role in reducing the information processing costs for investors.