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Fair Value Reclassifications of Financial Assets During the Financial Crisis

65 Pages Posted: 23 Jun 2010 Last revised: 2 Jul 2014

Jannis Bischof

University of Mannheim - Accounting and Taxation

Ulf Brüggemann

Humboldt University of Berlin - School of Business and Economics

Holger Daske

University of Mannheim - Accounting and Taxation

Date Written: June 30, 2014

Abstract

This study examines whether reclassifications of financial assets out of fair value categories during a market downturn are associated with regulatory benefits and informational costs. We find that the severity of regulatory capital restrictions and the lack of prudential filters for unrealized fair value changes are positively associated with a bank’s reclassification choice. For a small group of banks that have a high reclassification likelihood and the greatest need for additional regulatory capital, we observe a positive stock market reaction around the announcement of the new accounting option. For another group of banks that were initially not expected to reclassify, we find that abnormal stock returns around the announcement of the accounting choice increase in the regulatory capital effect of the reclassification. Finally, we document a positive association between banks’ bid-ask spreads and the reclassification choice for those banks that do not provide complete IFRS 7 disclosures about the unrecognized fair value changes.

Keywords: Bank Regulation, Fair Value Accounting, Financial Crisis, IAS 39, IFRS 7

JEL Classification: G14, G21, G28, M41, M48

Suggested Citation

Bischof, Jannis and Brüggemann, Ulf and Daske, Holger, Fair Value Reclassifications of Financial Assets During the Financial Crisis (June 30, 2014). Available at SSRN: https://ssrn.com/abstract=1628843 or http://dx.doi.org/10.2139/ssrn.1628843

Jannis Bischof (Contact Author)

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

Ulf Brüggemann

Humboldt University of Berlin - School of Business and Economics ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

Holger Daske

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

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