The usefulness of enhanced mandatory disclosure on specific terms and conditions of derivatives contracts: Evidence from Korea

This study investigates the incremental usefulness of the mandatory disclosure on the details of derivatives contracts beyond the fair value amount that is recognized on financial statements, exploiting a unique policy case in Korea during the 2008 financial crisis. The results show that the comprehensive notional amount based on the disclosure of terms and conditions for foreign exchange derivatives contracts is more closely associated with future earnings than the summary accounts under the financial statements. Furthermore, the detailed information alters the stock return sensitivity to foreign exchange rate changes incrementally beyond the financial statements-based information; the market reaction to the disclosure is stronger for firms with greater notional amounts of derivatives. Our findings provide new empirical evidence that the disclosure of specific derivatives terms substantially enhances investors’ assessments of risk exposure from derivatives instruments, and accordingly, support the call for more specific disclosure on derivatives.