Financial instrument disclosure in the Italian banking sector. a study on the value relevance of IFRS 7

This paper focuses on the issue of the relevance of financial instruments’ disclosure in the banking sector, considered as a topic of crucial importance especially after the recent financial crisis. Namely, this paper aims to test whether information required by IFRS 7 is value relevant for investors in order to support them in assigning appropriate risk levels in their investment decisions. The regulatory framework of bank’ financial risks is complex since it is formulated by a range of different bodies, including the Basel Committee, the IASB, the National Banking Supervisor and local accounting standards. Literature, however, argues for the incompleteness of such framework. This incompleteness is one of the premises for IFRS 7. The sample consists of the annual reports of all Italian listed banks over a 7-year period, 2007– 2013. To provide some first results, we have used an OLS model. We expect to provide valuable evidence that banks complying with IFRS 7 are rewarded with higher evaluation by the market. Results confirm our expectations, showing a positive association between banks’ value and the financial index disclosure. Our evidence contributes to the value relevance literature and brings useful insights to investors and regulators.