Anticipatory and implementation effects of FIN 46 on the behavior of different market participants

Abstract

We examine whether FASB-mandated modifications of the consolidation rules (FIN 46 and FIN 46R) resulted in perceptible changes in market participants' decisions as manifested in a variety of financial indicia. We find that financial analysts' idiosyncratic precision of information decreased and equity market participants acted as if they perceived higher risk as evidenced by reduced earnings response coefficients for these firms after 2001. On the other hand, we find that information users that likely had access to information regarding the off-balance-sheet debt structures prior to 2001 did not exhibit a similar increase in risk assessment. Specifically, we find that banks did not increase the loan spreads for FIN 46 firms and credit rating agencies did not lower the ratings of these firms more than those of other firms. This finding is consistent with our conjecture that these entities were aware of the true risk levels of FIN 46 firms even under the prior limited disclosure regime. Overall, we conclude that the perceived risk of firms that have previously structured a part of their operations in separate entities increased significantly with the expected promulgation of accounting guidance requiring them to bring in the previously off-balance-sheet assets, liabilities and results of operations into their financial statements. We interpret these results as evidence that these firms previously were assessed as having lower risk relative to their peers within the equity market. We conclude that the anticipation of FIN 46 was instrumental in changing the behavior of market participants who previously lacked access to information expected to be provided by the implementation of FIN 46, namely equity investors and analysts.JEL Classification: G14, G21, M41

Does Consolidation of Variable Interest Entities Improve the Pricing of Financial Reporting in Bank Holding Companies? Evidence From FAS 166/167

“…Second, as the popularity of securitization grows globally, the results of this study may help the FASB and the IASB in resolving the question of how issuers should account for securitizations. Finally, the study contributes to the SPE studies (e.g., Callahan et al, 2012;Gurun et al, 2012;Pourjalali et al, 2009), in which QSPEs are excluded from the samples. Research on the effect of SPEs on the financial statements and costs of capital has proven to be difficult and the findings inconclusive.…”

“…The study also contributes to the SPE studies in which QSPEs are excluded from the sample (e.g., Callahan et al, 2012; Gurun et al, 2012; Pourjalali et al, 2009). Research on the effect of SPEs on financial statements and the cost of capital has proven to be difficult and the findings inconclusive.…”

The Relation Between Voluntary Disclosure and Financial Reporting: Evidence from Synthetic Leases

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