The Market Pricing of Other-Than-Temporary Impairments

Posted: 28 Jun 2011 Last revised: 17 Jul 2014

Brad A. Badertscher

University of Notre Dame

Jeffrey J. Burks

University of Notre Dame

Peter D. Easton

University of Notre Dame - Department of Accountancy

Date Written: October 15, 2013

Abstract

When the fair value of an investment security falls below amortized cost and there is significant doubt that the firm can hold the security until the fair value recovers, an other-than-temporary impairment (OTTI) is recognized in net income. Thus, an OTTI is a disclosure about the prospect of recovering an unrealized loss. Our findings suggest that investors priced banks’ OTTI recognition during and after the financial crisis. Investors were unable to fully anticipate reported OTTIs, and priced OTTIs incrementally to reported unrealized gains/losses. After banks were required to bifurcate OTTIs, investors priced only the portion of OTTI recognized in earnings. Our results suggest that reporting unrealized losses in earnings via an OTTI changes how investors price the losses. The results inform recent standard-setting initiatives to expand disclosure about changes in fair value.

Keywords: fair value accounting, mark-to-market accounting, other-than-temporary impairments, unrealized losses, other comprehensive income, financial crisis, commercial banks

JEL Classification: M41, M42, M44

Suggested Citation

Badertscher, Brad A. and Burks, Jeffrey J. and Easton, Peter D., The Market Pricing of Other-Than-Temporary Impairments (October 15, 2013). The Accounting Review 2014, Volume 89, No. 3. Available at SSRN: https://ssrn.com/abstract=1873473 or http://dx.doi.org/10.2139/ssrn.1873473

Brad A. Badertscher

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Jeffrey J. Burks (Contact Author)

University of Notre Dame ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

Peter D. Easton

University of Notre Dame - Department of Accountancy ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-6096 (Phone)
574-631-5127 (Fax)

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