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The effect of the fair value option on bank earnings and regulatory capital management: Evidence from realized securities gains and losses

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  • Greiner, Adam J.

Abstract

Prior research shows that banks achieve reporting objectives using realized securities gains/losses on sales of available-for-sale securities (AFS). Building on this, I investigate whether earnings and regulatory capital management incentives differ between fair value option (FVO) banks and non-FVO banks. FVO banks are allowed to report unrealized gains/losses on elected AFS securities in both current earnings and regulatory capital, whereas, to receive this treatment, non-FVO adopters must sell AFS securities. Using a balanced panel sample covering pre- and post-FVO implementation periods, I find evidence that banks with net positive FVO earnings have fewer earnings and regulatory capital management incentives than do non-FVO banks. My study is of interest to standard setters seeking to reduce earnings and regulatory management behavior, and investors and researchers assessing the implications of the FVO on managers' discretionary actions.

Suggested Citation

  • Greiner, Adam J., 2015. "The effect of the fair value option on bank earnings and regulatory capital management: Evidence from realized securities gains and losses," Advances in accounting, Elsevier, vol. 31(1), pages 33-41.
    • Handle: RePEc:eee:advacc:v:31:y:2015:i:1:p:33-41
    DOI: 10.1016/j.adiac.2015.03.005
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    Cited by:

    1. S G Sisira Dharmasri Jayasekara & K L Wasantha Perera & A Roshan Ajward, 2018. "Fair Value Accounting Practices and Efficiency of Banks: A Theoretical Perspective," Accounting and Finance Research, Sciedu Press, vol. 7(4), pages 1-66, November.
    2. Aneta Hryckiewicz & Petra Pawlowski & Piotr Michal Mazur & Marcin Borsukb, 2022. "Sovereign Debt Holding and Bank Sensitivity toward Market Risk: An Alternative View of the Bank–Sovereign Problem," International Journal of Central Banking, International Journal of Central Banking, vol. 18(5), pages 1-52, December.
    3. Nengqi Pan & Millicent Chang & Xiaofei Pan, 2024. "Career concerns and earnings management in government‐owned banks," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 64(1), pages 475-506, March.

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    More about this item

    Keywords

    Fair value option; Earnings management; Regulatory capital; Realized securities gains and losses; Bank holding companies;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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