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Fair Value Accounting, Earnings Management and the use of Available-for-Sale Instruments by Bank Managers

Author

Listed:
  • Mary E. Barth

    (Graduate School of Business, Stanford University)

  • Javier Gomez-Biscarri

    (Department of Economics and Business, University of Pompeu Fabra and Barcelona Graduate School of Ec)

  • Ron Kasznik

    (Graduate School of Business, Stanford University)

  • Germán López-Espinosa

    (School of Economics and Business Administration, University of Navarra)

Abstract

Fair value accounting in banking has been criticized for the increased volatility that it generates in some accounting variables. One of its advantages, however, is that it reduces the possibility of discretionary earnings management, given that all gains and losses are immediately recognized. In this paper we qualify both considerations. The accounting regime of available-for-sale (AFS) securities allows for some degree of earnings and capital management: an AFS asset is reported at fair value but gains and losses over historical cost go into net income and measures of regulatory capital only when the asset is sold and the gain or loss realized. We use comprehensive data from US commercial banks and bank holding companies and provide evidence that fair value gains in AFS assets have consistently been used for earnings and capital management and that the holdings of AFS assets are related to the intensity of this activity. Our results show that the earnings management behavior is present both in listed and non-listed banks, suggesting that the motivations go beyond the incentives provided by capital markets. We also uncover significant differences in earnings management behavior over the years of the financial crisis.

Suggested Citation

  • Mary E. Barth & Javier Gomez-Biscarri & Ron Kasznik & Germán López-Espinosa, 2012. "Fair Value Accounting, Earnings Management and the use of Available-for-Sale Instruments by Bank Managers," Faculty Working Papers 05/12, School of Economics and Business Administration, University of Navarra.
    • Handle: RePEc:una:unccee:wp0512
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    References listed on IDEAS

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    Cited by:

    1. Tamás Szücs & József Ulbert, 2017. "Role and Measurement of Fair Valuation in the Hungarian Credit Institution Sector," Financial and Economic Review, Magyar Nemzeti Bank (Central Bank of Hungary), vol. 16(3), pages 51-73.
    2. Piosik Andrzej & Strojek-Filus Marzena, 2013. "An Assessment of the Application of Earnings Management Objectives and Instruments in Financial Reporting – Evidence of Survey Research Results," Scientific Annals of Economics and Business, Sciendo, vol. 60(2), pages 1-26, December.
    3. Diéne Mohamed Kamara, 2017. "La Gestion opportuniste du ratio de solvabilité bancaire via les ajustements réglementaires des fonds propres : Etude d'un échantillon de banques européennes," Post-Print hal-01907414, HAL.

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    More about this item

    Keywords

    fair value accounting; bank earnings; earnings management; income smoothing; available-for-sale asse;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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