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Pricing and Mispricing Effects of SFAS 131
Author(s) -
Hope OleKristian,
Kang Tony,
Thomas Wayne B.,
Vasvari Florin
Publication year - 2008
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/j.1468-5957.2007.02071.x
Subject(s) - earnings , valuation (finance) , multinational corporation , portfolio , economics , monetary economics , business , financial statement , value (mathematics) , financial economics , accounting , finance , audit , machine learning , computer science
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.