Do enhanced derivative disclosures work? An informational perspective

Firms use derivatives both for hedging and nonhedging purposes. The Statement of Financial Accounting Standards No. 161 (SFAS 161) requires firms to disclose the purposes of their derivatives usage, thereby helping investors to evaluate the effects of derivatives usage on firm performance. Using a hand‐collected sample of US listed firms and a difference‐in‐differences research design, we find that, compared with nonderivative‐users, derivative‐users compliant with SFAS 161 experience a significantly greater reduction in stock illiquidity and the probability of informed trading in the post‐SFAS 161 period, and such impact is evident only for firms with a high degree of investor attention.