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Are fair value options created equal? A study of SFAS 159 and earnings volatility

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  • Couch, Robert
  • Thibodeau, Nicole
  • Wu, Wei

Abstract

The fair value option (FVO) embedded in both SFAS 159 and IAS 39 was introduced to allow firms to reduce earnings volatility induced from mixed-measurement accounting. Fiechter (2011) finds a reduction in earnings volatility among IAS 39 FVO adopters. In contrast, we find that earnings volatility increased among U.S. financial institutions following SFAS 159 FVO adoption in 2008. In further analysis, we find that this result is driven by firms reporting fair value assets without reporting fair value liabilities. Our study uses a two-stage Heckman regression to control for treatment effects, and our findings are robust to difference-in-differences regressions with control samples constructed by propensity score matching. These results have implications for current debates regarding fair value accounting, accounting choice, and earnings volatility of financial institutions.

Suggested Citation

  • Couch, Robert & Thibodeau, Nicole & Wu, Wei, 2017. "Are fair value options created equal? A study of SFAS 159 and earnings volatility," Advances in accounting, Elsevier, vol. 38(C), pages 15-29.
    • Handle: RePEc:eee:advacc:v:38:y:2017:i:c:p:15-29
    DOI: 10.1016/j.adiac.2017.05.001
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    Cited by:

    1. Zamora-Ramírez, Constancio & Morales-Díaz, José, 2018. "The Use of Fair Value Measurement in Financial Reporting: A Literature Review/La Utilización del Valor Razonable en la Contabilidad: Revisión de la Literatura," Estudios de Economia Aplicada, Estudios de Economia Aplicada, vol. 36, pages 489-514, Mayo.
    2. Johannes Thesing & Patrick Velte, 2021. "Do fair value measurements affect accounting-based earnings quality? A literature review with a focus on corporate governance as moderator," Journal of Business Economics, Springer, vol. 91(7), pages 965-1004, September.
    3. Tobias Witter & Thorsten Sellhorn & Jens Müller & Vicky Kiosse, 2022. "Balance sheet smoothing," Berlin School of Economics Discussion Papers 0006, Berlin School of Economics.

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    More about this item

    Keywords

    Earnings volatility; Financial institutions; Fair value option; Fair value accounting; Global accounting standards; Accounting choice; SFAS 159; IAS 39;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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