The Value Relevance and Timeliness of Write-downs During the Financial Crisis of 2007–2009

Abstract

This study examines the value relevance and timeliness of write-downs reported by North American and European banks during the financial crisis of 2007–2009. Our study extends Vyas (2011), considering the association between write-downs and stock returns to evaluate the performance of fair value standards during the crisis. Specifically, we investigate claims that strict enforcements of standards resulted in write-downs that were excessive or unnecessary due to temporary market price distortions, or conversely, that standards were flexible enough to allow managers to engage in earnings or capital management. Our empirical results show that both fair-value and aggregate write-downs are associated dollar-for-dollar with contemporaneous security returns, suggesting that, on average, write-downs were timely throughout the financial crisis.

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