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The impact of IAS 39 on the risk-relevance of earnings volatility: Evidence from foreign banks cross-listed in the USA

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  • Duh, Rong-Ruey
  • Hsu, Audrey Wen-hsin
  • Alves, Paulo Alexandre Pimenta

Abstract

We examine the impact of adopting International Accounting Standard 39 – Financial Instruments: Recognition and Measurement (IAS 39) by non-US commercial banks cross-listed in the US on earnings volatility and its risk relevance. As IAS 39 requires the recognition of unrealized fair-value gains and losses for a larger set of financial and derivative-financial instruments, and the impairment charges for loans and receivables, we expect and find that IAS 39 adoption increased earnings volatility in IFRS-adopting firms from 2005 onwards. Furthermore, both hedge accounting and the fair value option under IAS 39 are designed to reduce mixed-measurement volatility and to improve the sensitivity of firm risk measures to earnings volatility. We also find that the relationship between credit ratings (proxy for risk) and earnings volatility increases for IFRS-adopting firms after 2005. The evidence is consistent with the argument that IAS 39 increases the credit relevance of earnings volatility.

Suggested Citation

  • Duh, Rong-Ruey & Hsu, Audrey Wen-hsin & Alves, Paulo Alexandre Pimenta, 2012. "The impact of IAS 39 on the risk-relevance of earnings volatility: Evidence from foreign banks cross-listed in the USA," Journal of Contemporary Accounting and Economics, Elsevier, vol. 8(1), pages 23-38.
    • Handle: RePEc:eee:jocaae:v:8:y:2012:i:1:p:23-38
    DOI: 10.1016/j.jcae.2012.03.002
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    1. Slavko Sodan, 2019. "Fair Value Hierarchy And Earnings Volatility," Economic Thought and Practice, Department of Economics and Business, University of Dubrovnik, vol. 28(2), pages 567-577, december.
    2. Liao, Lin & Kang, Helen & Morris, Richard D. & Tang, Qingliang, 2013. "Information asymmetry of fair value accounting during the financial crisis," Journal of Contemporary Accounting and Economics, Elsevier, vol. 9(2), pages 221-236.
    3. Nikolaos Eriotis & Theodoros Kounadeas & Dimitrios Vasiliou, 2019. "From IAS 39 To IFRS 9: Literature Review of Studies on the Implementation of IFRS in the European Banking Sector," International Journal of Finance, Insurance and Risk Management, International Journal of Finance, Insurance and Risk Management, vol. 9(3-4), pages 29-51.
    4. Ovi, Nafisa & Bose, Sudipta & Gunasekarage, Abeyratna & Shams, Syed, 2020. "Do the business cycle and revenue diversification matter for banks’ capital buffer and credit risk: Evidence from ASEAN banks," Journal of Contemporary Accounting and Economics, Elsevier, vol. 16(1).
    5. Michael Neel & Irfan Safdar, 2024. "Financial statement relevance, representational faithfulness, and comparability," Review of Quantitative Finance and Accounting, Springer, vol. 62(1), pages 309-339, January.
    6. Karen Benson & Peter M Clarkson & Tom Smith & Irene Tutticci, 2015. "A review of accounting research in the Asia Pacific region," Australian Journal of Management, Australian School of Business, vol. 40(1), pages 36-88, February.
    7. Manal Alidarous & Fouad Jamaani, 2021. "The Concurrent Effects of IFRS Mandate and Formal Institutional Quality on the Aftermarket Performance of IPO Firms in Emerging Countries," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 12(3), pages 320-344, May.
    8. Asmaul Husna & Ibnu Satria, 2019. "Effects of Return on Asset, Debt to Asset Ratio, Current Ratio, Firm Size, and Dividend Payout Ratio on Firm Value," International Journal of Economics and Financial Issues, Econjournals, vol. 9(5), pages 50-54.
    9. Samindi Ishara Hewa & Rajni Mala & Jinhua Chen, 2020. "IASB's independence in the due process: an examination of interest groups’ influence on the development of IFRS 9," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(3), pages 2585-2615, September.
    10. Johannes Thesing & Patrick Velte, 2021. "Do fair value measurements affect accounting-based earnings quality? A literature review with a focus on corporate governance as moderator," Journal of Business Economics, Springer, vol. 91(7), pages 965-1004, September.
    11. Rene Johannes & Dedy Dedy & Abdullah Muksin, 2018. "The Preparation of Banking Industry in Implementing IFRS 9 Financial Instruments (A Case Study of HSBC Holdings Plc Listed on London Stock Exchange of Year 2015 2017)," International Journal of Economics and Financial Issues, Econjournals, vol. 8(6), pages 124-136.
    12. Couch, Robert & Thibodeau, Nicole & Wu, Wei, 2017. "Are fair value options created equal? A study of SFAS 159 and earnings volatility," Advances in accounting, Elsevier, vol. 38(C), pages 15-29.
    13. Luqman Hakim & Martono Martono, 2019. "Fundamental Role of Macro and Microeconomics to Profitability and the Implications on Stock Return: Evidence from Banking Companies on the Indonesia Stock Exchange," International Journal of Economics and Financial Issues, Econjournals, vol. 9(6), pages 84-93.

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