Tainted Portfolios: How Impairment Accounting Rules Restrict Security Sales

Journal of Business Finance and Accounting, Vol. 46 (5-6), pp. 608-635, May/June 2019

45 Pages Posted: 3 Jan 2019 Last revised: 20 Jun 2019

See all articles by Brett Wooten Cantrell

Brett Wooten Cantrell

University of Mississippi - Patterson School of Accountancy

Christopher G. Yust

Texas A&M University

Date Written: December 17, 2018

Abstract

Contrary to claims that fair value accounting exacerbated banks’ securities sales during the recent financial crisis, we present evidence that suggests – if anything – that the current impairment accounting rules served as a deterrent to selling. Specifically, because banks must provide evidence of their “intent and ability” to hold securities with unrealized losses, there are strong incentives to reduce, rather than increase, security sales when market values decline to avoid “tainting” their remaining securities portfolio. Validating this concern, we find that banks incur greater other-than-temporary impairment (OTTI) charges when they sell more securities. We then find that banks sell fewer securities when their security portfolios have larger unrealized losses (and thus larger potential impairment charges), and these results are concentrated in banks with homogenous securities portfolios, expert auditors, more experienced managers, and greater regulatory capital slack. Overall, our results suggest that – contrary to critics’ claims – the accounting rules appear to have reduced banks’ propensity to sell their securities during the financial crisis.

Keywords: fair value accounting, financial crisis, impairment, OTTI, pro-cyclical, security sales, standard setting, auditor expertise

JEL Classification: G01, G21, M41, M42, M48

Suggested Citation

Cantrell, Brett Wooten and Yust, Christopher G., Tainted Portfolios: How Impairment Accounting Rules Restrict Security Sales (December 17, 2018). Journal of Business Finance and Accounting, Vol. 46 (5-6), pp. 608-635, May/June 2019. Available at SSRN: https://ssrn.com/abstract=3302903 or http://dx.doi.org/10.2139/ssrn.3302903

Brett Wooten Cantrell

University of Mississippi - Patterson School of Accountancy ( email )

P.O. Box 1848
Conner Hall
University, MS 38677
United States

Christopher G. Yust (Contact Author)

Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4353
United States
979.845.3439 (Phone)

HOME PAGE: http://www.christopheryust.com

Register to save articles to
your library

Register

Paper statistics

Downloads
23
Abstract Views
496
PlumX Metrics