The Effect of Mandated Market Risk Disclosures on the Quality of Information Contained in Analysts' Earnings Forecasts

The SEC issued FRR No. 48 to improve public disclosure of firms' market risk exposures. We examine whether the additional forward-looking quantitative market risk disclosures as mandated by FRR No. 48 are earning-relevant to the financial analysts and, if so, how the disclosures affect the quality of information contained in analysts' earnings forecasts? Using a sample of 226 S&P 500 (non-financial) firms which first disclosed market risk exposure in either 1997 or 1998, our results find the usual "10K effects, as observed earlier by Barron et al. (2002a), and also provide direct evidence supporting (1) the usefulness of market risk disclosures in improving the quality of information contained in analysts' forecasts and (2) disclosure format (or information contained therein) matters. Information contained in Comprehensive (COM) or Value-at-Risk (VAR) disclosure formats are earnings-relevant to analysts. In addition, (1) the announcements by firms that they are not subject to material market risk (IMM), or (2) market risk disclosure in Comprehensive (COM) format provide sufficient information to motivate and facilitate analysts in their searching for additional earnings-relevant information or implications. Our results are robust as we check and control for (1) timedependent information environmental factors, (2) expected general 10K effects, and (3) validity of three important assumptions of the BKLS model.