The SEC and FASB recently expressed concerns that investors do not fully assimilate all of the information provided by complex and incomplete derivatives and other comprehensive income ( OCI ) disclosures. My evidence supports these concerns. Specifically, I examine the information content of unrealized cash flow hedge gains/losses for future profitability and stock returns. An unrealized gain on a cash flow hedge suggests that the price of the underlying hedged item (i.e., commodity price, foreign currency exchange rate, or interest rate) moved in a direction that will impair the firm's profits after the hedge expires. Consequently, I find that unrealized cash flow hedge gains/losses are negatively associated with future gross profit after the firm's existing hedges have expired. This association only holds after the firm has reclassified its hedges into earnings, and is weaker for firms that can pass input price changes on to their customers. Finally, investors do not immediately price the cash flow hedge information. Instead, investors appear surprised by future realizations of gross margin, consistent with the view that complex and incomplete disclosures delay pricing. These results are relevant to policymakers involved in the current FASB and IASB project designed to simplify the accounting and disclosure for derivatives and, in particular, cash flow hedges.

[We investigate the relation between firms' weighted average cost of capital and internal financial resources, using mandatory pension contributions as a proxy for internal financial resources. Rauh (2006) documents a negative association between mandatory pension contributions and capital .expenditures. We find that an increase in mandatory pension contributions increases the cost of capital, but only for firms facing greater external financing constraints. Our results suggest that firms' cost of capital is an intervening variable that can explain Rauh's finding that mandatory pension contributions (i.e., internal financing constraints) result in foregone investment. Overall, we provide evidence consistent with recent studies (Rauh 2006; Almeida and Campello 2007) that conclude that financial market frictions affect real economic activity and, in particular, corporate investment.]

We investigate the equity valuation effects of the Pension Protection Act of 2006 (PPA 2006). The PPA 2006 has two main provisions: (1) firms must fully fund their pension plans within seven years (previously allowed 30 years to fund 90 percent of the pension liability) and (2) firms receive a tax deduction for contributions up to 150 percent of the pension liability (previously 100 percent). After controlling for the effects of SFAS 158, growth opportunities, the cost of external funds, and other information released during our sample period, we examine pension firms’ abnormal returns surrounding key dates in the legislative process leading to the adoption of the PPA 2006. First, we find a mean negative abnormal return of −4.20 percent during the period in which the PPA 2006 was first voted on by Congress. The mean (median) firm in our sample experienced a $310 million ($60 million) decline in market capitalization. Second, we find that the valuation effect was more negative for firms with larger unfunded pension liabilities and larger capital expenditure requirements, while firms with higher marginal tax rates experienced a positive effect. Third, we find no evidence of differential valuation effects for firms in different “at risk” categories as defined by the PPA 2006. Finally, we find a significant number of pension freezes occurred during our sample period. Our results are stronger when excluding these firms from our sample.

Les auteurs étudient les répercussions de la Pension Protection Act de 2006 (PPA 2006) sur la valeur boursière des actions. La PPA 2006 contient deux dispositions principales : 1) les entreprises doivent assurer la capitalisation intégrale de leur régime de retraite en sept ans (alors qu’une période de trente ans leur était auparavant accordée pour capitaliser 90 pour cent de leur passif au titre du régime) et 2) elles peuvent se prévaloir d’une déduction fiscale à l’égard des cotisations à concurrence de 150 pour cent du passif au titre du régime (alors que le plafond de la déduction était antérieurement de 100 pour cent). Une fois contrôlés l’incidence de la norme SFAS 158, les possibilités de croissance, le coût du financement externe et les autres informations publiées au cours de la période d’échantillonnage, les auteurs examinent les rendements anormaux des entreprises ayant un régime de retraite, à proximité des dates marquantes du processus législatif ayant menéà l’adoption de la PPA 2006. Premièrement, ils observent un rendement anormal moyen négatif de – 4,20 pour la période au cours de laquelle la PPA 2006 a fait l’objet d’un premier vote au Congrès. La capitalisation boursière de l’entreprise moyenne (médiane) de l’échantillon a enregistré un déclin de 310 millions de dollars (60 millions de dollars). Deuxièmement, les auteurs constatent que les répercussions sur la valeur boursière sont plus négatives dans le cas des entreprises présentant des passifs non capitalisés plus importants au titre du régime et devant faire face à des dépenses en immobilisations plus substantielles, alors que les entreprises dont les taux d’imposition marginaux sont plus élevés enregistrent des répercussions positives. Troisièmement, les auteurs ne relèvent aucun élément permettant d’affirmer que les répercussions sur la valeur boursière varient selon les différentes catégories de risque définies par la PPA 2006. Enfin, ils recensent un nombre appréciable de cas de blocage du régime au cours de la période soumise à l’étude. Les résultats sont plus marqués encore lorsque ces entreprises sont retirées de l’échantillon.

We investigate the equity valuation effects of the Pension Protection Act of 2006 (hereafter PPA 2006). The PPA 2006 has two main provisions: (1) firms must fully fund their pension plans within seven years (previously allowed 30 years to fund 90 percent of the pension liability), and (2) firms receive a tax deduction for contributions up to 150 percent of the pension liability (previously 100 percent). After controlling for the effects of SFAS 158, growth opportunities, the cost of external funds and other information released during our sample period, we examine pension firms' abnormal returns surrounding key dates in the legislative process leading to the adoption of the PPA 2006. First, we find a mean negative abnormal return of -4.20 percent during the period in which the PPA 2006 was first voted on by Congress. The mean (median) firm in our sample experienced a $310 million ($60 million) decline in market capitalization. Second, we find that the valuation effect was more negative for firms with larger unfunded pension liabilities and larger capital expenditure requirements, while firms with higher marginal tax rates experienced a positive effect. Third, we find no evidence of differential valuation effects for firms in different at risk categories as defined by the PPA 2006. Finally, we find a significant number of pension freezes occurred during our sample period. Our results are stronger when excluding these firms from our sample.

We investigate the relation between firms' weighted average cost of capital and internal financial resources, using mandatory pension contributions as a proxy for internal financial resources. Rauh (2006) documents a negative association between mandatory pension contributions and capital expenditures. We find that an increase in mandatory pension contributions increases the cost of capital, but only for firms facing greater external financing constraints. Our results suggest that firms' cost of capital is an intervening variable that can explain Rauh's finding that mandatory pension contributions (i.e., internal financing constraints) result in foregone investment. Overall, we provide evidence consistent with recent studies (Rauh 2006; Almeida and Campello 2007) that conclude that financial market frictions affect real economic activity and, in particular, corporate investment. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: [email protected]., Oxford University Press.

This study investigates the association between quantitative disclosure and information risk, hypothesizing that a greater proportion of numerical information in earnings conference calls decreases information risk and thus increases firm value. We find that, even after controlling for earnings information, more extensive numerical disclosure correlates positively with earnings announcement returns. This effect concentrates in firms with poorer information environments and during periods of heightened performance uncertainty. Finally, we show that a greater proportion of numerical disclosure reduces implied volatility, bid-ask spread, and implied cost of capital. Our findings highlight numerical disclosure's role in reducing information risk and emphasize its importance in financial disclosures.

Regulation Fair Disclosure (Reg FD) Form 8‐K filings provide a venue where managers release information to the market as a whole that they designate as being material . Using this setting, we study trading patterns immediately prior to the public disclosure of material information. We offer three main results. First, using both intraday and daily trading data, we find abnormal trading volume of 21 percent (13 percent) in the hour (day) prior to the public disclosure, respectively. Second, we find that this pre‐disclosure abnormal trading volume is concentrated in firms that are smaller, have more growth opportunities, issue fewer voluntary disclosures, and have weaker external monitoring. Finally, we find that this pre‐disclosure volume is concentrated in subsamples in which the information relates to a firm's material contracts, a firm holds investor/analyst conferences, and there is insider trading activity in a firm's shares. Our results do not concentrate in a small number of firms or industries, and do not appear to be explained by the form through which managers first release the material information (e.g., Form 8‐K, press release, website posting, or social media). Our results are also robust to controlling for the firm's other filings and peer filings that occur around the disclosure. Overall, the trading patterns we document may show that, inconsistent with the spirit of Reg FD, a subset of investors trade on information managers deem material prior to its broad, public release.