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The association between fair value measurements and banks' discretionary accounting choices11I thank Roger Graham (editor) and two anonymous reviewers for the suggestions and guidance that substantially improved the article. I thank Randy Elder, Susan Albring, Craig Nichols, Lihong Liang, Shawn Huang, Milena Petrova, David Harris, Joseph Comprix, Matt Hart, reviewers and participants at the American Accounting Association Annual meeting, the FARS Midyear Meeting and the Accounting and Finance workshop at University of Massachusetts Boston for their helpful comments. I gratefully acknowledge the financial support from the Martin J. Whitman School of Management at Syracuse University and the College of Management at University of Massachusetts Boston. I have no other relevant or material financial interests related to the research described in this paper. The usual disclaimer applies

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  • Xu, Xiaolu

Abstract

This study examines the association between fair value measurements and banks' discretionary loan loss provisions using regulatory financial data from 2009 to 2016 for a sample of U.S. public bank holding companies. I find that banks recognizing larger proportions of fair value assets and liabilities based on level 2 and level 3 inputs are associated with lower discretionary loan loss provisions. However, there is no significant association between level 1 fair value assets and liabilities and discretionary loan loss provisions. When pre-managed earnings are lower, banks with larger proportions of level 2 and level 3 fair value assets and liabilities report smaller discretionary loan loss provisions to inflate earnings. Banks reporting larger proportions of level 2 and level 3 fair value assets and liabilities are more likely to use discretionary loan loss provisions to beat earnings benchmarks and manage tier one capital ratios. Overall, the results support the proposition that fair value assets and liabilities based on level 2 and level 3 inputs are less transparent and are subject to more discretion regarding loan loss provisions.

Suggested Citation

  • Xu, Xiaolu, 2019. "The association between fair value measurements and banks' discretionary accounting choices11I thank Roger Graham (editor) and two anonymous reviewers for the suggestions and guidance that substantial," Advances in accounting, Elsevier, vol. 44(C), pages 108-120.
    • Handle: RePEc:eee:advacc:v:44:y:2019:i:c:p:108-120
    DOI: 10.1016/j.adiac.2018.12.007
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