Value-Relevance of Banks' Derivatives Disclosures

Abstract

This paper investigates the value-relevance of derivatives disclosures provided by banks under the Statement of Financial Accounting Standards No. 119 (SFAS 119). The findings suggest that the fair value estimates of derivatives help explain cross-sectional variation in bank share prices after controlling for fair values and book values of on-balance sheet assets and liabilities. Preliminary findings also suggest that fair value estimates of derivatives are useful in evaluating banks' hedging effectiveness. These results are in contrast to prior research that provide inconclusive evidence on the value-relevance of disclosed fair value estimates of off-balance sheet derivative instruments.

JEL Classification: M41, G21