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Fair Value Disclosures for Investment Securities and Bank Equity: Evidence from SFAS No. 115

Myung S. Park · Taewoo Park · Byung T. Ro

78 citations0/0 files storedJournal of Accounting Auditing & Finance

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Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting Financial Reporting and Valuation Research

Abstract

This paper examines whether the intent-based fair value disclosures by security type under SFAS No. 115 explain the value of bank equity. Focusing on available-for-sale (AFS) and held-to-maturity (HTM) securities, we find both AFS and HTM value differences (fair less book values) explain the value of bank equity. The AFS value differences also explain raw stock returns and abnormal returns, while the HTM value differences explain only the raw returns. The AFS value differences have greater explanatory power than those of the HTM. The explanatory power of the securities' value differences increases when they are considered as separate (AFS and HTM) variables rather than in aggregation. Also, the AFS value differences explain one-year-ahead bank earnings, while the HTM value differences do not. These results remain robust across the different model specifications examined. Overall, they are consistent with our hypotheses and with the view of SFAS No. 115 on the relevance and usefulness of the fair value disclosures to investors.

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References

1992The Cross-Section of Expected Stock Returns 1981The relationship between return and market value of common stocks 1961The Theory and Measurement of Business Income 1994Fair Value Accounting: Evidence from Investment Securities and the Market Valuation of Banks.1994The Nature of Information in Commercial Bank Loan Loss Disclosures.1996Value-Relevance of Banks' Fair Value Disclosures under SFAS No. 107.1996Fair value disclosures by bank holding companies 1989Financial Reporting, Supplemental Disclosures, and Bank Share Prices

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2013The Predictive Ability of Fair Values for Future Financial Performance of Commercial Banks and the Relation of Predictive Ability to Banks' Share Prices 2020The Value Relevance of Risk Disclosure: An Analysis of the Banking Sector 2010The Value Relevance of Financial Instruments Disclosure in Malaysian Firms Listed in the Main Board of Bursa Malaysia 2015The Impact of Fair Value Accounting on Earnings Quality in Eastern European Countries 2016The Pros and Cons of Fair Value Accounting in a Globalized Economy

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