Information Asymmetry of Fair Value Accounting and Loan Loss Provisions During the Global Financial Crisis

Posted: 15 Mar 2010 Last revised: 4 Mar 2022

See all articles by Lin Liao

Lin Liao

University of New South Wales (UNSW)

Helen Kang

UNSW Sydney

Richard Donald Morris

UNSW Australia Business School, School of Accounting

Qingliang Tang

University of Western Sydney

Date Written: September 1, 2010

Abstract

This paper investigates whether U.S. banks’ assets and liabilities, reported using Fair Value Accounting (FVA) under SFAS 157 Fair Value Measurement, are associated with information asymmetry among equity investors during the 2008 Global Financial Crisis. Using bid-ask spread as a proxy for information asymmetry, and controlling for bank size, profitability, default risk and capital adequacy, we find that bid-ask spread is positively and significantly associated with total fair value net assets and net assets measured using inputs of fair value Level 1, Level 2, and Level 3, as specified in SFAS 157. We also examine whether banks’ loan loss provisions are associated with information asymmetry, since the U.S. Securities and Exchange Commission (2008) has alleged that large loan loss provisions, determined based on managerial internal information and discretion, played a significant role in bank failures in the Global Financial Crisis.

We find that loan loss provisions are also positively and significantly associated with bid-ask spread. In summary, our findings show that both FVA and loan loss provisions are associated with information asymmetry among equity investors during the 2008 Global Financial Crisis, with loan loss provisions being the stronger of the two effects.

Keywords: Information asymmetry, Fair value accounting, Loan loss provisions, Global Financial Crisis

JEL Classification: M41

Suggested Citation

Liao, Lin and Kang, Helen Hyon Ju and Morris, Richard Donald and Tang, Qingliang, Information Asymmetry of Fair Value Accounting and Loan Loss Provisions During the Global Financial Crisis (September 1, 2010). Available at SSRN: https://ssrn.com/abstract=1569076 or http://dx.doi.org/10.2139/ssrn.1569076

Lin Liao

University of New South Wales (UNSW) ( email )

Kensington
High St
Sydney, NSW 2052
Australia

Helen Hyon Ju Kang (Contact Author)

UNSW Sydney ( email )

School of Accounting, Auditing & Taxation
UNSW Sydney
Sydney, NSW 2052
Australia

Richard Donald Morris

UNSW Australia Business School, School of Accounting ( email )

Sydney, NSW 2052
Australia

Qingliang Tang

University of Western Sydney ( email )

School of Accounting
Locked Bag 1797, Penrith South DC
Sydney, NSW 1797
Australia
+61 2 9685 9465 (Phone)
+61 2 9685 9339 (Fax)

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