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Panacea, Pandora's box, or placebo: Feedback in bank mortgage-backed security holdings and fair value accounting

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  • Bhat, Gauri
  • Frankel, Richard
  • Martin, Xiumin

Abstract

We examine the relation between bank holdings of mortgage-backed securities (MBS) and MBS prices. Theory suggests feedback between MBS holdings and underlying asset markets can be aggravated by mark-to-market accounting. We measure feedback by the relation between asset returns and the changes in bank MBS holdings. Consistent with the existence of feedback effects related to mark-to-market, we find that for banks with high MBS, more nonperforming loans, and lower total capital ratio, changes in bank MBS positions are positively associated with changes in MBS prices and that this relation is reduced after the April 2009 mark-to-market rule clarification. To assess the effect of feedback on shareholder value, we test whether the stock-price response of banks to the announcement of the mark-to-market accounting rule clarification is associated with the intensity of feedback behavior. We find that the stock market reaction to the rule change is more positive for banks with more MBS, higher nonperforming loans and higher pre-rule-change feedback. We also find positive bond-price reactions to the rule change. Overall, our results suggest feedback related to mark-to-market accounting had a measurable effect on shareholder value.

Suggested Citation

  • Bhat, Gauri & Frankel, Richard & Martin, Xiumin, 2011. "Panacea, Pandora's box, or placebo: Feedback in bank mortgage-backed security holdings and fair value accounting," Journal of Accounting and Economics, Elsevier, vol. 52(2), pages 153-173.
  • Handle: RePEc:eee:jaecon:v:52:y:2011:i:2:p:153-173
    DOI: 10.1016/j.jacceco.2011.06.002
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    References listed on IDEAS

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    Cited by:

    1. Maul, D. & Schiereck, D., 2016. "The bond event study methodology since 1974," Publications of Darmstadt Technical University, Institute for Business Studies (BWL) 80723, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute for Business Studies (BWL).
    2. repec:spr:reaccs:v:22:y:2017:i:3:d:10.1007_s11142-017-9410-6 is not listed on IDEAS
    3. Igor Goncharov & Sander Triest, 2014. "Unintended Consequences of Changing Accounting Standards: The Case of Fair Value Accounting and Mandatory Dividends," Abacus, Accounting Foundation, University of Sydney, vol. 50(3), pages 341-367, September.
    4. Brian Bratten & Monika Causholli & Urooj Khan, 2016. "Usefulness of fair values for predicting banks’ future earnings: evidence from other comprehensive income and its components," Review of Accounting Studies, Springer, vol. 21(1), pages 280-315, March.
    5. Augustin, Patrick & Subrahmanyam, Marti G. & Tang, Dragon Yongjun & Wang, Sarah Qian, 2014. "Credit Default Swaps: A Survey," Foundations and Trends(R) in Finance, now publishers, vol. 9(1-2), pages 1-196, December.
    6. Wessel M. Badenhorst & Petri H. Ferreira, 2016. "The Financial Crisis and the Value-relevance of Recognised Deferred Tax Assets," Australian Accounting Review, CPA Australia, vol. 26(3), pages 291-300, September.
    7. Michel Magnan & Haiping Wang & Yaqi Shi(Sans nom), 2016. "Fair Value Accounting and the Cost of Debt / La comptabilité à la juste valeur et le coût de la dette pour une entreprise," CIRANO Working Papers 2016s-32, CIRANO.
    8. Chircop, Justin & Novotny-Farkas, Zoltán, 2016. "The economic consequences of extending the use of fair value accounting in regulatory capital calculations," Journal of Accounting and Economics, Elsevier, vol. 62(2), pages 183-203.
    9. repec:eee:jaecon:v:63:y:2017:i:2:p:385-403 is not listed on IDEAS
    10. Ellul, Andrew & Jotikasthira, Chotibhak & Lundblad, Christian T. & Wang, Yihui, 2013. "Mark-to-market accounting and systemic risk: evidence from the insurance industry," LSE Research Online Documents on Economics 60968, London School of Economics and Political Science, LSE Library.
    11. Amir Amel-Zadeh & Geoff Meeks, 2013. "Bank Failure, Mark-to-market and the Financial Crisis," Abacus, Accounting Foundation, University of Sydney, vol. 49(3), pages 308-339, September.
    12. Aboody, David & Hughes, John S. & Bugra Ozel, N., 2014. "Corporate bond returns and the financial crisis," Journal of Banking & Finance, Elsevier, vol. 40(C), pages 42-53.
    13. Kolasinski, Adam C., 2011. "Mark-to-market regulatory accounting when securities markets are stressed: Lessons from the financial crisis of 2007–2009," Journal of Accounting and Economics, Elsevier, vol. 52(2), pages 174-177.
    14. Laux, Christian, 2016. "The economic consequences of extending the use of fair value accounting in regulatory capital calculations: A discussion," Journal of Accounting and Economics, Elsevier, vol. 62(2), pages 204-208.
    15. Beatty, Anne & Liao, Scott, 2014. "Financial accounting in the banking industry: A review of the empirical literature," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 339-383.
    16. Loveland, Robert, 2016. "How prompt was regulatory corrective action during the financial crisis?," Journal of Financial Stability, Elsevier, vol. 25(C), pages 16-36.

    More about this item

    Keywords

    Feedback effect; MBS; Fair value accounting; TARP;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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