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Are the Recent Restatements of Financial Institutions 10K’s due to the Perceived Earning Volatility Caused by SFAS 161?

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  • Veliota Drakopoulou

Abstract

The goal of this research was to investigate the controversy surrounding the inability of SFAS 133 an amendment of SFAS 161 to portray the economics of hedging. This research examined whether or not BHCs’ design of hedge effectiveness tests was determined by the concern of the additional earnings volatility possibly evolved from economic hedges that do not qualify for hedge accounting. The results implicate that most BHCs after the amendment of SFAS 161 reassessed their risk management approach to one that is more accounting responsive to ensure that most hedges are highly effective to qualify for hedge accounting. The findings suggest that BHCs reciprocate between risk management and earnings volatility when face a trade-off between employ economic hedges which increase earnings volatility and discontinue economic hedges to avoid increases in earnings volatility. The results accede with the results of Park (2004), Singh (2008), Zhang (2008), Hariom (2014), Bratten (2016), Spencer (2018), and Thomas (2018) who found that derivative users had lower levels of earnings volatility after the introduction of SFAS 161.

Suggested Citation

  • Veliota Drakopoulou, 2018. "Are the Recent Restatements of Financial Institutions 10K’s due to the Perceived Earning Volatility Caused by SFAS 161?," Accounting and Finance Research, Sciedu Press, vol. 7(4), pages 122-122, November.
    • Handle: RePEc:jfr:afr111:v:7:y:2018:i:4:p:122
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    References listed on IDEAS

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    1. Peijie Wang, 2009. "Global Derivatives Markets," Springer Books, in: The Economics of Foreign Exchange and Global Finance, chapter 11, pages 1-30, Springer.
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    Cited by:

    1. Elio Alfonso & Dana Hollie & Shaokun Carol Yu, 2019. "Cash Flow Restatements: Stock Market Reaction to Overstated versus Understated Restatements," Accounting and Finance Research, Sciedu Press, vol. 8(3), pages 1-1, August.

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      JEL classification:

      • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
      • Z0 - Other Special Topics - - General

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