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The Value Relevance of Financial Institutions’ Fair Value Disclosures: A Study in the Difficulty of Linking Unrealized Gains and Losses to Equity Values

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  • Haim A. Mozes

Abstract

This article provides a residual‐income valuation framework for assessing whether fair value disclosures required by SFAS 119, Disclosures About Derivative Financial Instruments and Fair Values of Financial Instruments, are value‐relevant. The primary theoretical and empirical result is that when using a residual‐income valuation model, the estimated relation between variables measuring fair value‐book value differences for financial instruments and security prices may be contrary to what one would have expected. Specifically, the greater the firm’s return on invested capital and growth rate relative to its cost of capital, the more negative the estimated relation between fair value‐book value differences for financial instruments and security prices. A generalization of this result is that tests linking equity values to various types of unrecognized gains and losses are, in many cases, unlikely to generate the hypothesized positive relation between equity values and the unrecognized gains and losses.

Suggested Citation

  • Haim A. Mozes, 2002. "The Value Relevance of Financial Institutions’ Fair Value Disclosures: A Study in the Difficulty of Linking Unrealized Gains and Losses to Equity Values," Abacus, Accounting Foundation, University of Sydney, vol. 38(1), pages 1-15, February.
    • Handle: RePEc:bla:abacus:v:38:y:2002:i:1:p:1-15
    DOI: 10.1111/1467-6281.00095
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    Cited by:

    1. Takashi Obinata, 2002. "Concept and Relevance of Income," CIRJE F-Series CIRJE-F-171, CIRJE, Faculty of Economics, University of Tokyo.
    2. Musa Yelwa Abubakar & Nasiru Abdulsallam & Muhammad Yusuf Alkali, 2017. "The Impact of the New Accounting Reporting Among Listed Firms in Nigerian Stock Market," Asian Journal of Social Sciences and Management Studies, Asian Online Journal Publishing Group, vol. 4(1), pages 1-9.
    3. Badreddine Hamdi & Houda Elabidi, 2009. "L'Information Comptable En Juste Valeur : Quelle Utilite Pour Les Investisseurs ?," Post-Print halshs-00459351, HAL.
    4. Li Wang & Pervaiz Alam & Stephen Makar, 2005. "The Value-Relevance of Derivative Disclosures by Commercial Banks: A Comprehensive Study of Information Content Under SFAS Nos. 119 and 133," Review of Quantitative Finance and Accounting, Springer, vol. 25(4), pages 413-427, December.
    5. Panayotis Manganaris & Jordan Floropoulos & Irini Smaragdi, 2011. "Conservatism and Value Relevance: Evidence from the European Financial Sector," American Journal of Economics and Business Administration, Science Publications, vol. 3(2), pages 259-269, April.

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