Financial Instruments Disclosure - Dissertation Example

Download file to see previous pages Eccher and Healy (2000), Gelb and Zarowin (2002), and Lang, Ready, and Yetman (2003) investigated the relationship between accounting quality and share prices. Lang, Ready, and Yetman (2003) stated from the research evidence that cross-listed firms as compared to non-cross-listed firms have higher accounting quality as the accounting data of cross-listed firms are more highly associated with price (Lang, Ready, and Yetman, 2003, p.375). The relationship between share price and accounting quality is also found in different market segments around different cultures since share prices are affected by the financial disclosure of an organization.

Gelb and Zarowin (2002) examined the relationship between the level of corporate disclosure of financial instruments and stock prices. This study found that organizations with more financial instruments disclosure attain higher Earnings Response Coefficients [ERCs] (i.e. greater price information) in the future as compared to organizations with less disclosure (Gelb and Zarowin, 2002, p.33).

A controversial issue related to financial instruments is their valuation at fair value. Although fair value accounting is considered to be the most relevant information for predicting future cash flows, the reliability of the fair value measures has been questioned (Hitz, 2007, pp.323-362). Barth (1994) investigated and found how disclosed fair value estimates of investment securities of banks, and gains and losses of securities are reflected in share price on being compared with their historical cost (Hassan and Mohd-Saleh, 2010, pp. 246-247).

1.1 Disclosure of Non-Proprietary Information
Proprietary information is a type of information whose disclosure affects a company’s future earnings potential and is beneficial to the shareholders occasionally (Dye, 1985, p.123). Managers are generally reluctant to disclose non-proprietary information about financial instruments since they feel that such disclosure may affect the annual earnings and the share prices of the company (Dye, 1985, p.124).

As the market value of a company’s shares is affected by disclosure, so the shareholders may try to implement incentive contracts that encourage managers to suppress unfavorable information and release that information which could lead to rising in the market value of the shares. In this contract, when the investors are aware of the fact that managers have some information related to financial instruments but they are unable to disclose such due to its adverse effect on the price, in such situation the investors decrease their demand which will lead to falling in price, thus the manager will be free to disclose the information. Managers disclose all the non-proprietary information of financial instruments in relation to their effect on their prices (Dye, 1985, pp.123-125).

Cost and Benefit analysis of financial instruments disclosure was initiated to end the use of unreliable footnoting made to hide important information and to ensure an in-depth analysis of costs, risks related to investment, and return. ...Download file to see next pages Read More