The Implementation of SFAS 71, Bank Equity Valuation, and the Moderating Effect of Bank Size (original) (raw)
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The impact of SFAS 157 on fair value accounting and future bank performance
International Journal of Accounting & Information Management, 2020
Purpose The purpose of this paper is to investigate whether levels-classified fair values of US banks based on SFAS 157: Fair Value Measurements, as recognised in the quarterly financial statements of the banks over the period from 2008 until 2015, have predictive value in relation to the banks’ future financial performance measured by operating cash flows and earnings over a three-quarter horizon period. In addition, we consider whether the global financial crisis (GFC) impacted the relationship between SFAS 157–based levels‐classified fair values and bank future financial performance. Design/methodology/approach We develop hypotheses connecting the net levels-classified bank fair values based on SFAS 157 with banks’ future financial performance. We test the hypotheses by estimating three-period quarters’ ahead forecasting models. We also use these models to test for the impact of the GFC on the relationship between the fair values and future financial performance. Findings Our fin...
Accounting Choices and Risk Management: SFAS 115 and U.S. Bank Holding Companies
SSRN Electronic Journal, 2001
This paper provides evidence that regulatory contracts affect firms' accounting choices and risk management decisions. Specifically, we investigate whether an exogenous shock to regulatory risk induced by Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities," (SFAS 115) encouraged U.S. banks to deviate from portfolio and risk benchmarks when they adopted the standard. Because we cannot observe relevant benchmarks, we model portfolio and risk decisions as functions of macroeconomic and firm-specific factors using data from a period when regulatory capital was immune to SFAS 115 accounting. We examine a sample of 230 publicly-traded banks and find that 1) irrespective of adoption timing, banks classified too few securities as AFS relative to estimated benchmarks, 2) weaker banks that adopted the standard early classified far more securities as AFS relative to benchmarks, 3) banks altered the size of their securities portfolios along with the levels of interest risk and credit risk as regulatory capital decreased, and 4) the level of interest risk on banks' loan portfolios increased at the time of SFAS 115 adoption. We also explore the 1995 FASB amnesty when firms could 're-adopt' SFAS 115. We find that banks used the 1995 FASB amnesty to undo strategic initial SFAS 115 adoption decisions. Taken together, our findings suggest that SFAS 115 caused some of the accounting and economic consequences predicted by bankers, analysts, and academics.
Accounting Choices and Risk Management: SFAS No. 115 and U.S. Bank Holding Companies*
Contemporary Accounting Research, 2002
This paper provides evidence that regulatory contracts affect firms' accounting choices and risk-management decisions. Specifically, we investigate whether an exogenous shock to regulatory risk induced by Statement of Financial Accounting Standards No. 115 , "Accounting for Certain Investments in Debt and Equity Securities" (SFAS 1993), encouraged U.S. banks to deviate from portfolio and risk benchmarks when they adopted the standard. Because we cannot observe relevant benchmarks, we model portfolio and risk decisions as functions of macroeconomic and firm-specific factors using data from a period when regulatory capital was immune to SFAS No. 115 accounting. We examine a sample of 230 publicly traded banks and find that (1) irrespective of adoption timing, banks classified too few securities available for sale (AFS) relative to estimated benchmarks; (2) weaker banks that adopted the standard early classified far more securities as AFS relative to benchmarks; (3) banks altered the size of their securities portfolios along with the levels of interest-rate risk and credit risk as regulatory capital decreased; and (4) the level of interest-rate risk on banks' loan portfolios increased at the time of SFAS No. 115 adoption. We also explore the 1995 Financial Accounting Standards Board (FASB) amnesty when firms could "readopt" SFAS No. 115. We find that banks used the 1995 FASB amnesty to undo strategic initial SFAS No. 115 adoption decisions. Taken together, our findings suggest that SFAS No. 115 caused some of the accounting and economic consequences predicted by bankers, analysts, and academics. Keywords Economic consequences of financial reporting; Regulatory risk; Risk management; SFAS No. 115 Condensé Les auteurs démontrent que les exigences réglementaires influent sur les choix comptables des sociétés et sur leurs décisions en matière de gestion du risque. Ils se demandent, plus * Accepted by Gord Richardson. Mary Lea McAnally thanks the Center for Business Measurement and Assurance Services at the University of Texas for financial support. This paper has benefited from the substantive comments of two anonymous reviewers,
Stock Market Reactions to SFAS No. 96: Evidence from Early Bank Adopters
The Financial Review, 1993
Statement of Financial Accounting Standards (SFAS) No. 96, "Accounting for Income Taxes," issued by the Financial Accounting Standards Board (FASB) in December 1987 changed accounting for income tax recognition and accrual. The original deadline for implementation of SFAS No. 96 was December 15, 1988, and earlier adoption was encouraged. This study examines empirically the stock price impact of four pertinent announcement dates regarding SFAS No. 96 for 19 banks that adopted the statement in late 1987 and early 1988. Our results suggest that these early bank adopters have different characteristics from other banks that cause them to benefit from the changes in accounting for deferred taxes and explain their voluntary adoption of the standard.
The Impact of FSP FAS 157-4 on Commercial Banks
International Advances in Economic Research, 2012
In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" (SFAS 157). Later in 2008, U. S. banks were mired in a credit crisis. Many economists and bankers suggested that one cause of the 2008 credit crisis was the requirements of SFAS 157 and a movement began to have its provisions amended or rescinded. The result of this movement was the passage of FSP FAS 157-4. The purposes of this study are to chronicle the events that lead to the release of FSP FAS 157-4, to report on the impact of FSP FAS 157-4 for the quarter ending March 31, 2009 for a sample of banks and to investigate the characteristics of the banks that early adopted FSP FAS 157-4 as compared to the non-adopters. The results did not find the predicted income increasing effect and indicated that total asset size and financial asset size were significant factors in the early adoption decision.
Market pricing of banks’ fair value assets reported under SFAS 157 since the 2008 financial crisis
Journal of Accounting and Public Policy, 2015
Our paper presents early evidence on how investors rely on the fair value estimates of assets reported by banks as required by Statement of Financial Accounting Standards No. 157 (SFAS 157) in 2008. We observe significant variation in the pricing of different levels of fair value assets, with the pricing being less for mark-to-model assets (i.e., assets with lower liquidity and greater information risk) than for mark-to-market assets. We also find that the pricing of mark-to-model assets declined over the course of 2008, consistent with increasing market concerns about illiquidity and information risk associated with these assets. In the cross-section, we find evidence that mark-to-model assets are priced higher by investors for banks with greater capital adequacy. We also find that the pricing of fair value assets, especially the mark-to-model assets, is higher when banks are audited by better auditors. Overall, our paper uses both time-series and cross-sectional analyses to provide insights on investors' valuation of the fair value estimates of assets as reported by banks during the economic crisis.
Disclosure level and cost of equity capital: evidence from the banking industry
Managerial and Decision Economics, 2005
The impact of voluntary disclosures on cost of equity capital is of significant interest to investors and managers. Using a disclosure scoring model this association is examined for 135 banks from Europe, North America and Australia. After controlling for the cross-sectional variation in beta, firm size, price to book value and price to earnings ratios, the study found that higher disclosure levels are associated with a reduction in cost of equity capital. Disclosures about risk management practices seem to most influence the reduction in the cost of equity capital. European banks show greater reduction in the cost of equity capital from improved disclosures compared to their non-European counterparts.
Commercial Banks and Value Relevance of Derivative Disclosures after SFAS 133: Evidence from the USA
Review of Pacific Basin Financial Markets and Policies, 2013
In the last decade there has been a significant increase in the use of derivatives as a vehicle to manage financial risk. The sudden spurt of derivatives has resulted in the Financial Accounting Standards Board (FASB) being forced to develop new standards for quantification and disclosure. The financial standard of interest to this study is Statement of Financial Accounting Standards (SFAS 133). SFAS 133 requires all derivatives, without exception and regardless of the accounting treatment for the underlying asset, liability, or transaction, to be recognized in the balance sheet as either liabilities or assets. SFAS 133 entitled Accounting for derivative activities and hedging (and SFAS 137, which postponed the implementation of SFAS 133 until June 2000) is different from prior standards in that it requires recognition as opposed to mere disclosure in the notes. The justification given for implementing SFAS 133 was to increase transparency to investors. In this study we empirically investigate this issue with particular focus on whether SFAS 133 provides incremental information above that provided by reported earnings, book value, and proxies for omitted variables. We study commercial banks since they are among the most frequent users of large-scale derivative contracts and their use has increased significantly over the last two decades, and in particular over the last five years. Our findings indicate that information regarding total derivative contracts, when disclosed in the financial statements as required by SFAS 133/137, is value relevant to investors. However, investors view this information negatively, perhaps attributing this to higher risk. Losses on holding derivatives are viewed positively and gains are viewed negatively.
This study examines the value-relevance of banks' derivative disclosures under Statements of Financial Accounting Standards (SFAS) Nos. 119 and 133. Using the complete time-series of SFAS No. 119 disaggregated notional value disclosures and the most recently available SFAS No. 133 fair value data, this study investigates whether such expanded disclosures provide incremental information content beyond earnings and book value. Our results indicate that banks' notional principal amount disclosures are value-relevant, and that this evidence of incremental information content is robust to the inclusion of recently available fair value data and alternative model specifications.
Journal of Banking & Finance, 1995
We investigate fair value accounting critics' assertions by restating earnings and regulatory capital to reflect banks' disclosed investment securities fair values. We find: (1) Fair value-based earnings are more volatile than historical cost earnings, but share prices do not reflect the incremental volatility. (2) Banks violate regulatory capital requirements more frequently under under fair value than historical cost accounting. Fair value-based violations help predict regulatory capital violations, but share prices do not reflect this potential increased regulatory risk. Only historical cost violations are market information events. (3) Share prices reflect interest rates changes, even though investment securities' contractual cash flows are. fixed.