Accounting Choices and Risk Management: SFAS 115 and U.S. Bank Holding Companies

Posted: 1 May 2002

See all articles by Leslie D. Hodder

Leslie D. Hodder

Indiana University - Kelley School of Business - Department of Accounting

Mark J. Kohlbeck

Florida Atlantic University - School of Accounting

Mary Lea McAnally

Texas A&M University - Department of Accounting

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Abstract

This paper provides evidence that regulatory contracts affect firms' accounting choices and risk management decisions. Specifically, we investigate whether an exogenous shock to regulatory risk induced by Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities," (SFAS 115) encouraged U.S. banks to deviate from portfolio and risk benchmarks when they adopted the standard. Because we cannot observe relevant benchmarks, we model portfolio and risk decisions as functions of macroeconomic and firm-specific factors using data from a period when regulatory capital was immune to SFAS 115 accounting. We examine a sample of 230 publicly-traded banks and find that 1) irrespective of adoption timing, banks classified too few securities as AFS relative to estimated benchmarks, 2) weaker banks that adopted the standard early classified far more securities as AFS relative to benchmarks, 3) banks altered the size of their securities portfolios along with the levels of interest risk and credit risk as regulatory capital decreased, and 4) the level of interest risk on banks' loan portfolios increased at the time of SFAS 115 adoption. We also explore the 1995 FASB amnesty when firms could "re-adopt" SFAS 115. We find that banks used the 1995 FASB amnesty to undo strategic initial SFAS 115 adoption decisions. Taken together, our findings suggest that SFAS 115 caused some of the accounting and economic consequences predicted by bankers, analysts, and academics.

Keywords: SFAS 115, regulatory risk, risk management, economic consequences of financial reporting

JEL Classification: M41, G21, K23

Suggested Citation

Davis Hodder, Leslie D. and Kohlbeck, Mark J. and McAnally, Mary Lea, Accounting Choices and Risk Management: SFAS 115 and U.S. Bank Holding Companies. Comtemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=303939

Leslie D. Davis Hodder

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

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

Mark J. Kohlbeck

Florida Atlantic University - School of Accounting ( email )

777 Glades Avenue
KH 119
Boca Raton, FL 33431-0991
United States
561-297-1363 (Phone)

Mary Lea McAnally (Contact Author)

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States
979-845-5017 (Phone)
979-845-0014 (Fax)

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