The Predictive Ability of Fair Values for Future Financial Performance of Commercial Banks and the Relation of Predictive Ability to Banks' Share Prices

Contemporary Accounting Research, forthcoming

63 Pages Posted: 9 Feb 2010 Last revised: 12 May 2014

See all articles by Mark E. Evans

Mark E. Evans

Wake Forest University

Leslie D. Hodder

Indiana University - Kelley School of Business - Department of Accounting

Patrick E. Hopkins

Indiana University - Kelley School of Business - Department of Accounting

Date Written: February 7, 2012

Abstract

For a sample of commercial banks during 1994 – 2008, we find that accumulated fair value adjustments for interest-bearing investment securities are positively associated with future interest income and total realized income from these investments. Additional tests reveal that accumulated fair value adjustments on investment securities also have predictive ability for future investment-security-related cash flows. Our analyses reveal that our predictive ability proxy for interest-bearing investment securities is positively related to the measurement precision of reported fair value measurements. We also provide evidence that the relative ability of fair values to predict reported accounting income is a factor that strengthens the association between fair values and commercial banks’ stock prices. Taken together, our study suggests that fair values have predictive ability for future income realization despite the low persistence of changes in fair value that has been extensively documented in prior studies. Further, we find that our proxy for predictive ability captures banks’ expectations of future above- or below-market relative interest income, which is a real economic condition that is incrementally reflected in current equity prices.

Keywords: Commercial banks, fair values, predictive ability, value relevance

JEL Classification: M41 G21 M48 G19

Suggested Citation

Evans, Mark E. and Davis Hodder, Leslie D. and Hopkins, Patrick E., The Predictive Ability of Fair Values for Future Financial Performance of Commercial Banks and the Relation of Predictive Ability to Banks' Share Prices (February 7, 2012). Contemporary Accounting Research, forthcoming, Available at SSRN: https://ssrn.com/abstract=1549025 or http://dx.doi.org/10.2139/ssrn.1549025

Mark E. Evans

Wake Forest University ( email )

P.O. Box 7659
Winston-Salem, NC 27109-7285
United States

Leslie D. Davis Hodder (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Patrick E. Hopkins

Indiana University - Kelley School of Business - Department of Accounting ( email )

Kelley School of Business
1309 E. 10th Street
Bloomington, IN 47405
United States
812-855 2617 (Phone)
812-855 8679 (Fax)

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