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http://ssrn.com/abstract=1522122
 
 

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Discretionary Measurement of Financial Assets during the 2008 Financial Crisis


Peter Fiechter


University of Neuchatel - Institute of Financial Analysis

Conrad Meyer


University of Zurich - Institute for Accounting and Control

February 1, 2011


Abstract:     
This paper examines whether banks use discretion in loan loss provisions (LLP) and fair value estimates to manage earnings during the 2008 financial crisis. We select the crisis as the investigation period because the market turmoil provides both measurement uncertainties and strong incentives for earnings management. Using a sample of 291 U.S. bank holding companies, we predict and find that banks use discretionary fair value estimates based on unobservable inputs (i.e., Level 3) to smooth earnings. For LLP, we do not find consistent evidence, mainly because better corporate governance mechanisms effectively reduce the use of discretionary LLP to smooth earnings. However, better corporate governance does not reduce measurement discretion in Level 3. We assign this finding to the substantial measurement leeway of Level 3 positions, the little experience with SFAS 157 disclosures, and the increased measurement uncertainty during the crisis.

Number of Pages in PDF File: 60

Keywords: Fair Value Measurement, Earnings Management, 2008 Financial Crisis, Loan Loss Provisions (LLP), Level 3, SFAS 157, Corporate Governance

JEL Classification: G21, M41

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Date posted: December 15, 2009 ; Last revised: March 31, 2014

Suggested Citation

Fiechter, Peter and Meyer, Conrad, Discretionary Measurement of Financial Assets during the 2008 Financial Crisis (February 1, 2011). Available at SSRN: http://ssrn.com/abstract=1522122 or http://dx.doi.org/10.2139/ssrn.1522122

Contact Information

Peter Fiechter (Contact Author)
University of Neuchatel - Institute of Financial Analysis ( email )
Pierre-a-Mazel,7
Neuchatel, CH-2000
Switzerland
Conrad Meyer
University of Zurich - Institute for Accounting and Control ( email )
Plattenstrasse 14
CH-8032 Zurich
Switzerland
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