Mandatory Disclosure of Derivative Losses: Survey and Assessment

Abstract

The Korea Exchange requires firms listed in the exchange to disclose derivative losses as major events. This study surveys disclosure practices of listed firms to assess the current disclosure regulation. Using hand-collected data on mandatory derivative loss disclosures from 2008 to 2021, we find that most disclosures concern losses from items that are not classified as derivatives under the Financial Investment Services and Capital Markets Act. Such disclosures are unrelated to the objective of the disclosure regulation, which is to inform investors of the riskiness of derivative transactions. This discrepancy in the regulation and practice is caused by the failure to incorporate significant changes in accounting standards to the regulation. This study proposes two regulatory suggestions: either clarify the regulation’s objectives and scope of derivatives under the current regulation, or amend the regulations to expand the scope of derivatives to accounting-based derivatives. This study aims to enhance market participants’ understanding of the disclosure regulations and efficiency of the information environment in the Korean capital market.