The FVO and Firms’ Earnings Management Incentives

25 Pages Posted: 4 Feb 2015

See all articles by Pei Hui Hsu

Pei Hui Hsu

California State University, East Bay - School of Business & Economics

Date Written: October 1, 2009

Abstract

This paper examines the incentives utilized by firms in applying the FVO (SFAS 159) by analyzing firms’ application decisions under different circumstances. I confirm the finding in prior literature that firms apply SFAS 159 to manipulate earnings upward to meet or beat earnings target. Additionally, I find that approximately 42% of firms adopting SFAS 159 recognized unrealized losses, this stratagem employed by firms suggests that they elect the fair value option (FVO) to smooth incomes. Although the FASB and prior literature suggest that hedge accounting users are more likely to apply a more cost-savings SFAS 159 over hedge accounting (SFAS 133), my findings dispute cost-savings as the likely reason, suggesting that a hedge accounting user’s decision to adopt FVO is not driven by cost-savings consideration.

Suggested Citation

Hsu, Pei Hui, The FVO and Firms’ Earnings Management Incentives (October 1, 2009). Available at SSRN: https://ssrn.com/abstract=2559996 or http://dx.doi.org/10.2139/ssrn.2559996

Pei Hui Hsu (Contact Author)

California State University, East Bay - School of Business & Economics ( email )

25800 Carlos Bee Boulevard
Hayward, CA CALIFORNIA 94542
United States

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