Does Fair Value Accounting Affect How Banks Convey Information About Future Performance? Evidence from SFAS 115

48 Pages Posted: 19 Jul 2022

See all articles by Jonathan Black

Jonathan Black

Purdue University - Department of Accounting

Thomas Godwin

Purdue University - Department of Accounting

David G. Harris

Syracuse University - Joseph I. Lubin School of Accounting

Abstract

Studies find that banks realize gains and losses on investment securities to signal changes in future operating performance. We do not find evidence of this behavior using a sample beginning after the enactment of Statement of Financial Accounting Standard 115 (SFAS 115). We hypothesize that SFAS 115’s fair value disclosure requirement caused managers to stop signaling with realized gains and losses (RGL) by increasing the transparency of RGL earnings management. Our tests indicate a significant reduction in the association between RGL and future earnings changes after SFAS 115, suggesting that the standard reduced RGL signaling. Consistent with a loss of valuable information, we find that analyst forecast quality decreased and information asymmetry increased for affected banks. Collectively, these findings suggest that SFAS 115 reduced earnings management with RGL, as the FASB intended, but may have reduced the informativeness of financial reporting at banks that previously used asset sales to signal.

Keywords: Information asymmetry, Investment securities, SFAS 115, Asset sales, Earnings Management

Suggested Citation

Black, Jonathan and Godwin, Thomas and Harris, David G., Does Fair Value Accounting Affect How Banks Convey Information About Future Performance? Evidence from SFAS 115. Available at SSRN: https://ssrn.com/abstract=4167267 or http://dx.doi.org/10.2139/ssrn.4167267

Jonathan Black

Purdue University - Department of Accounting ( email )

Krannert School of Management
West Lafayette, IN 47907-1310
United States

Thomas Godwin (Contact Author)

Purdue University - Department of Accounting ( email )

Krannert School of Management
West Lafayette, IN 47907-1310
United States

David G. Harris

Syracuse University - Joseph I. Lubin School of Accounting ( email )

Whitman School of Management
721 University Ave
Syracuse, NY 13244-2130
United States
315-443-3362 (Phone)
315-443-5457 (Fax)

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