Do SEC Disclosures Reduce Investors' Disagreements about Firms' Exposures to Market Risk?: A Trading Volume Analysis

Abstract

This paper uses a trading volume analysis to examine the extent to which SEC-mandated disclosures make firms' market risk exposures more transparent to investors. We hypothesize that if the SEC's quantitative market risk disclosures reduce investor disagreements about firms' risk exposures, trading volume associated with market rate or price changes should decline after the disclosures are made public. We test for this relationship across three samples of firms that provide the mandated market risk disclosures for the first time in their 10-K reports. We find that the trading volume associated with changes in market rates or prices consistently declines after the 10-K filing for firms exposed to changes in interest rates and foreign currency exchange rates. In contrast, for firms exposed to commodity price changes, we find limited evidence of a decline in trading volume associated with changes in energy commodity prices, and no evidence of a decline in trading volume associated with changes in non-energy commodity prices. We explore several explanations for the weaker commodity price results, some relating to potential deficiencies in the reported commodity information and others to research design issues. In general, we interpret the results as providing evidence suggesting that the SEC's quantitative market risk disclosures reduce investor disagreements about firms' exposures to market risks.