An empirical analysis of the economic implications of fair value accounting for investment securities

Beatty, Anne; Chamberlain, Sandra; Magliolo, Joseph

doi:10.1016/s0165-4101(96)00429-6

Cited by 101 publications

(70 citation statements)

References 14 publications

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…Much of this research focuses on equity market reactions to particular accounting standards in the US, such as fair value accounting required under Statement of Financial Accounting Standards (SFAS) 115 (Beatty et al 1996;Cornett et al 1996), and employee stock-based compensation under SFAS 123 (Dechow et al 1996).…”

Section: Background and Hypothesis Development Backgroundmentioning

confidence: 99%

Market Reaction to Mandatory Nonfinancial Disclosure

2015

View full text Add to dashboard Cite

This paper examines the equity market reaction to events associated with the passage of a directive in the European Union (EU) mandating increased nonfinancial disclosure, which affected firms listed on EU exchanges or having significant operations in the EU. The mandated disclosures relate to firms' environmental, social, and governance performance. Using a crosscountry sample, we first document an on average negative market reaction to events increasing the likelihood of passage for this regulation, consistent with equity investors anticipating net costs with the directive's passage for most firms. Exploiting cross-sectional variation, we then predict and document a more negative market reaction for firms having: (i) low pre-directive nonfinancial disclosure levels, consistent with investors anticipating these future disclosures to reveal worse-than-expected news; (ii) weaker performance on nonfinancial issues, consistent with expectations for these firms to incur future costs to internalize current externalities; and (iii) lower ownership by institutional asset owners, consistent with such investors demanding further disclosures than mandated by the directive. The average market reaction for firms with superior nonfinancial performance and disclosure in our sample is positive, suggesting that investors expect net benefits from the passage of the directive for these firms.Key Words: event study; ESG reporting; international; nonfinancial disclosure; sustainability; environmental; social responsibility; governance Acknowledgments: We thank the following for useful comments and discussion: Bob Eccles, Alan Jagolinzer, Janine Maniora, Estelle Sun, and Tingting Ye. * Market Reaction to Mandatory Nonfinancial DisclosureAbstract: This paper examines the equity market reaction to events associated with the passage of a directive in the European Union (EU) mandating increased nonfinancial disclosure, which affected firms listed on EU exchanges or having significant operations in the EU. The mandated disclosures relate to firms' environmental, social, and governance performance. Using a crosscountry sample, we first document an on average negative market reaction to events increasing the likelihood of passage for this regulation, consistent with equity investors anticipating net costs with the directive's passage for most firms. Exploiting cross-sectional variation, we then predict and document a more negative market reaction for firms having: (i) low pre-directive nonfinancial disclosure levels, consistent with investors anticipating these future disclosures to reveal worse-than-expected news; (ii) weaker performance on nonfinancial issues, consistent with expectations for these firms to incur future costs to internalize current externalities; and (iii) lower ownership by institutional asset owners, consistent with such investors demanding further disclosures than mandated by the directive. The average market reaction for firms with superior nonfinancial performance and disclosure in our sample is positive,...

show abstract

Section: Background and Hypothesis Development Backgroundmentioning

confidence: 99%

Market Reaction to Mandatory Nonfinancial Disclosure

2015

View full text Add to dashboard Cite

show abstract

“…Fair value is considered the most useful market characteristics as far as measurement in fi nancial reporting concerns. The economic background for this assertion can be found in Beatty et al (1996), or Heaton et al (2009). However, we should have in our mind that "fair value is not panacea and other measurement bases also have desirable characteristics" (Barth, 2006).…”

Section: Background and Literature Overviewmentioning

confidence: 99%

The Role of Fair Value Measurement in the Recent Financial Crunch

Procházka¹

2011

Prague Economic Papers

View full text Add to dashboard Cite

Abstract:Fair value measurement became pervasive to fi nancial reporting over last 20 years. Under fair value accounting, entities are obliged or permitted to measure particular assets and liabilities at their fair values as at the reporting dates. Fair value is a current market-based hypothetical value. This market value is not always directly observable. The debate on usefulness of fair value accounting has arisen in connection with the fi nancial crunch and economic crisis in years [2007][2008][2009]. The opponents of fair value accounting insist on that fi nancial reporting based on fair value measurement has accelerated the fi nancial crisis and signifi cantly worsened the impact on affected companies. On the other hand, there are several important opinions in favour of fair value accounting. The paper aim is to contribute to the actual debate whether fair value accounting played the role of a messenger or a mover in the recent fi nancial crunch and subsequent economic recession and to analyse the characteristics of fair value accounting from the economic point of view.

show abstract

“…Thus, the control variables include the pre-adoption level of accumulated other comprehensive income fuel hedge to capture the financial statement impact to firms from fuel hedging (AOCIFH), whether the firm is a low cost carrier (LOWCOST), and the firm's performance (ROA). Following prior studies (Beatty, Chamberlain, and Magliolo 1996;Dou, Wong, and Xin 2013) …”

Section: Cross-sectional Analysesmentioning

confidence: 92%

Strategic Entry Decisions, Accounting Signals, and Risk Management Disclosure

Zou¹

2012

SSRN Journal

View full text Add to dashboard Cite

This dissertation investigates the economic consequences from hedge accounting signals and risk management disclosure. I first examine the product market consequences to these accounting signals and related disclosure in Chapter 1, then stock market reactions to disclosure requirements in Chapter 2.Chapter 1 examines potential entrants' strategic entry decisions in response to incumbents' accounting information and related disclosure. I predict that potential entrants are more likely to enter markets in which the incumbents' accounting information suggests higher future production costs that are specific to the incumbents themselves. I further hypothesize that the relation is stronger when the accounting signals are accompanied by more disclosure. Using detailed U.S. airline industry data and hedge accounting disclosure under SFAS 133, I find that potential entrants are more likely to enter routes in which the incumbents' lower accumulated other comprehensive income from fuel hedges suggests their higher future production costs. This entry pattern is stronger when incumbents have more transparent annual report disclosure regarding their fuel hedge programs. The entry pattern is also stronger after a systematic increase in risk management disclosure requirements following the (exogenous) adoption of SFAS 161.iii Chapter 2 analyzes stock returns of U.S. airlines around events leading up to the adoption of SFAS 161. SFAS 161 enhanced the disclosure requirements for derivatives and hedging activities. I find that U.S. airlines experienced statistically significant positive returns around the key events leading up to the adoption of SFAS 161. I then examine the cross-sectional variation of the returns around these events. Regression results provide initial support for the real effects theory that greater disclosure requirements could distort firms' hedging and production decisions and lead to suboptimal behavior.In summary, this dissertation provides evidence that competitors use hedge accounting signals and related disclosure in making product market decisions. Meanwhile, additional riskmanagement disclosures may also distort firms' hedging and production behavior, leading to suboptimal decisions. This dissertation sheds light on the ongoing projects by the FASB and the IASB on hedge accounting and disclosure and informs the regulators that costs and benefits should be weighted in hedge accounting policy setting.iv ACKNOWLEDGMENTS

show abstract

An empirical analysis of the economic implications of fair value accounting for investment securities

Cited by 101 publications

References 14 publications

Market Reaction to Mandatory Nonfinancial Disclosure

Market Reaction to Mandatory Nonfinancial Disclosure

The Role of Fair Value Measurement in the Recent Financial Crunch

Strategic Entry Decisions, Accounting Signals, and Risk Management Disclosure

Contact Info

Product

Resources

About