Fair Value Accounting, Earnings Management and the use of Available-for-Sale Instruments by Bank Managers
AbstractFair 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.
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Bibliographic InfoPaper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 05/12.
Length: 52 pages
Date of creation: 12 Nov 2012
Date of revision:
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Web page: http://www.unav.es/facultad/econom
fair value accounting; bank earnings; earnings management; income smoothing; available-for-sale asse;
Find related papers by JEL classification:
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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