AN ECONOMIC EVALUATION OF A FINANCIAL REPORTING REGULATION: THE CASE OF STATEMENT NO. 52

This dissertation examines the information content of a financial reporting regulation, Statement No. 52 of the Financial Accounting Standards Board, which regulates the way firms must report for their international subsidiaries. If a signal has information content, market agents will react to its announcement, and abnormal price reaction should be observed. Previous research has shown that market agents react to changes in cash flow but not to changes in earnings not accompanied by corresponding changes in cash flow. This study examines, using various methodologies, the price reaction of securities impacted by Statement No. 52. Four announcement dates are investigated to determine if any abnormal reaction occurs: the date when the proposed regulation (exposure draft) was first announced, the date of the announcement of the revised exposure draft, the date of the announcement of the adoption of the regulation, and the date that firms first announced earnings under the use of the regulation. For the first three dates studied, abnormal reaction was only observed on the date of the announcement of the revised exposure draft. The negative reaction observed is explained by an anticipated decrease in cash flow. This would occur due to the change in the proposed regulation which would cause firms to spend additional economic resources to hedge their increased accounting exposure to exchange rate fluctuations. In examining the earnings announcement date, a model is provided which partitions the earnings announcement into two signals: the reported information caused directly by the regulation, and information that would have been provided had the regulation not been adopted. On this date, abnormal performance was observed due to the earnings which would have been announced had the regulation not been implemented. No abnormal reaction was observed due to the announcement of cosmetic changes in earnings caused by the implementation of the regulation. It is suggested that further analysis of financial regulation, such as the one performed in this dissertation, is needed to provide additional information on the impact of regulatory decisions. This could lead to improved decision making by regulatory agencies