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The predictive value of bank fair values

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  • Ehalaiye, Dimu
  • Tippett, Mark
  • van Zijl, Tony

Abstract

Fair value, the value of an item in an orderly exchange, has been shown to have greater value relevance than historical cost. However, there is limited literature on the predictive ability of fair value. Our study contributes to this emerging area of research by examining the predictive ability of the SFAS 107 fair value disclosures by U.S. banks for future performance as measured by operating cash flows and earnings over a three-year time horizon. Furthermore, we provide evidence on the influence of the 2007/2008 Global Financial Crisis (GFC) on the relationships between bank fair values and future performance, thereby showing whether market illiquidity affected the underlying relationships. We also test for the impact of bank characteristics - size, capital adequacy and growth prospects - on predictive ability. Our findings suggest that fair values have predictive ability for both the cash flow and earnings measures of performance and that the GFC did not have an adverse impact on the predictive ability of bank fair values. However, we find that the predictive ability of fair value is strongest for operating cash flows. The study supports the relevance of fair value, as indicated by predictive ability for performance, and thus makes an important contribution to the fair value accounting literature and accounting standard-setting.

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  • Ehalaiye, Dimu & Tippett, Mark & van Zijl, Tony, 2017. "The predictive value of bank fair values," Pacific-Basin Finance Journal, Elsevier, vol. 41(C), pages 111-127.
    • Handle: RePEc:eee:pacfin:v:41:y:2017:i:c:p:111-127
    DOI: 10.1016/j.pacfin.2016.10.008
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