Improving Financial Statement Footnotes: Evidence from Derivative and Hedging Disclosures

Abstract

I investigate whether changes in derivative and hedging footnote disclosures required by SFAS 161 affect investor and analyst uncertainty. My study is motivated by accounting standard setters' and researchers' interest in disclosure effectiveness, and by prior research linking financial disclosures to measures of uncertainty. For a broad sample of firms, I use textual analysis to measure changes in the amount and salience of derivative and hedging information caused by SFAS 161. Using a difference-in-differences design to study the effects of these changes, I find that uncertainty is reduced for firms adopting SFAS 161. In addition, I show that this reduction tends to be greater for firms whose disclosures were more affected by SFAS 161, consistent with the new disclosures improving investor understanding. I also find that improvements to the qualitative and quantitative content of disclosures have more impact than improvements to disclosure salience.