Improving Financial Statement Footnotes: Evidence from Derivative and Hedging Disclosures

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 investors' interpretations of public information 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 investor uncertainty is reduced for firms adopting SFAS 161. In addition, I find that for some uncertainty proxies this reduction is greater for firms whose disclosures were more affected by SFAS 161, consistent with the new disclosures improving investor understanding. I also find evidence of a decreased association between bid-ask spread and movements in risk factors, indicating that SFAS 161 reduced uncertainty stemming from these movements.