Risk Relevance of Fair Value Gains and Losses, and the Impact of Disclosure and Corporate Governance

58 Pages Posted: 16 Feb 2008

See all articles by Gauri Bhat

Gauri Bhat

Southern Methodist University (SMU) - Accounting Department

Date Written: January 14, 2008

Abstract

This study uses variance decomposition analysis to examine the variance contribution of fair value gains and losses (FVGL) relative to net income (NI) in driving security returns for a sample of 180 US commercial banks for the period 2001-2005. I document that FVGL are significant in explaining the volatility of unexpected returns and that the relative importance of FVGL to NI is an increasing function of disclosure and corporate governance. While the effect of disclosure is direct, the effect of corporate governance is indirect and comes via disclosures. Further, I classify disclosures by type of risk and find that the relative variance contribution of FVGL increases with the level of disclosure related to interest rate risk, credit risk and derivatives risk for banks that are exposed to these risks. Overall, the results suggest that FVGL are risk relevant; and that disclosure and corporate governance aid investors in evaluating the risk revelation attributes of fair value estimates.

Keywords: banks, fair value, variance decomposition

JEL Classification: M41, E50

Suggested Citation

Bhat, Gauri, Risk Relevance of Fair Value Gains and Losses, and the Impact of Disclosure and Corporate Governance (January 14, 2008). Available at SSRN: https://ssrn.com/abstract=1094183 or http://dx.doi.org/10.2139/ssrn.1094183

Gauri Bhat (Contact Author)

Southern Methodist University (SMU) - Accounting Department ( email )

United States
214-7682964 (Phone)

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