Information asymmetry in disclosure of foreign exchange risk management: can regulation be effective?

A reduction in information asymmetry, and hence in the monitoring burden between agent and principal, is one of the aims of the regulation of financial reporting disclosure in active capital markets. Theoretical models of voluntary disclosure have sought to explain the persistence of information asymmetry in terms of the perceptions of those who supply information and those who use it in market decisions. In the late 1990s listed companies in the US and the UK implemented annual report disclosures to satisfy regulatory requirements for disclosure relating to foreign currency risk management. This paper presents empirical evidence of financial statement disclosure where the information asymmetry may be assessed by comparing ex post the explicit disclosure of information in the annual report with prior questionnaire responses from the same companies. It shows, through a two-country comparison, that disclosure regulations drawn up at similar times and with similar driving forces, can have a different impact in two different regulatory environments. Also, in both regulatory regimes a substantial element of information asymmetry remains, consistent with the expectations generated from the theoretical voluntary disclosure models. The paper concludes that regulation of qualitative disclosures, while taking heed of the market's requirements for information, has not yet found the mechanism whereby transparency is complete.