The Effects of the FASB's Relaxation of Fair Value Rules on the Quality of U.S. Bank Earnings

36 Pages Posted: 15 Nov 2012

See all articles by Neil L. Fargher

Neil L. Fargher

Australian National University (ANU)

John Ziyang Zhang

University of Liverpool

Date Written: November 12, 2012

Abstract

In the face of political pressure in 2009, the FASB relaxed fair value rules to give managers more discretion in measurement of fair value. Supporters argued that the accounting regulatory change would help convey managers’ private information on the measurement of fair values, while critics of the change were concerned that the increased managerial discretion would be opportunistically exploited by managers to achieve regulatory forbearance. This study investigates these two assertions by examining the impacts of relaxing fair value rules on the quality of earnings. Using a sample of U.S. bank holding companies we find that an apparent increase in managerial discretion in fair value is associated with a lower earnings response coefficient during the three-day window around earnings announcements and a higher probability of meeting analysts’ forecasts. Overall, the results indicate that the relaxation of fair value measurement rules adversely impacted the quality of financial reporting by U.S. banks.

Suggested Citation

Fargher, Neil L. and Zhang, John, The Effects of the FASB's Relaxation of Fair Value Rules on the Quality of U.S. Bank Earnings (November 12, 2012). Available at SSRN: https://ssrn.com/abstract=2175373 or http://dx.doi.org/10.2139/ssrn.2175373

Neil L. Fargher

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601
Australia

John Zhang (Contact Author)

University of Liverpool ( email )

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