This paper examines whether the sensitivity analysis disclosure on currency risk mandated by IFRS 7 Financial Instruments: Disclosures conveys useful information to investors. Using an Italian sample, we analyse the effect both on stock returns and trading volume. Our results show that, after the adoption of IFRS 7, the market reaction to foreign exchange rate changes is aligned with the quantitative information provided by firms. On the other hand, before IFRS 7, investors did not assess firms’ exposures to currency risk properly. We also document that IFRS 7 quantitative disclosure reduces the trading volume sensitivity to foreign exchange rate changes, which proxies for investor uncertainty and diversity of opinion. Taken together, these findings suggest that a backward-looking disclosure is as useful for investors as the forward-looking quantitative disclosures on market risk required by Financial Reporting Release No. 48.

MARKET REACTIONS TO THE DISCLOSURES ON CURRENCY RISK UNDER IFRS 7

MATTEI, MARCO MARIA;PALMUCCI, FABRIZIO
2012

Abstract

This paper examines whether the sensitivity analysis disclosure on currency risk mandated by IFRS 7 Financial Instruments: Disclosures conveys useful information to investors. Using an Italian sample, we analyse the effect both on stock returns and trading volume. Our results show that, after the adoption of IFRS 7, the market reaction to foreign exchange rate changes is aligned with the quantitative information provided by firms. On the other hand, before IFRS 7, investors did not assess firms’ exposures to currency risk properly. We also document that IFRS 7 quantitative disclosure reduces the trading volume sensitivity to foreign exchange rate changes, which proxies for investor uncertainty and diversity of opinion. Taken together, these findings suggest that a backward-looking disclosure is as useful for investors as the forward-looking quantitative disclosures on market risk required by Financial Reporting Release No. 48.
2012
P. Bonetti; M.M. Mattei; Palmucci F.
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11585/124528
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