IDEAS home Printed from https://ideas.repec.org/a/eee/quaeco/v59y2016icp83-98.html
   My bibliography  Save this article

The fair value option for liabilities and stock returns during the financial crisis

Author

Listed:
  • Couch, Robert
  • Wu, Wei

Abstract

We analyze the stock returns following the adoption of fair value option for liabilities (FVOL) embedded in the SFAS 159 by financial institutions during the financial crisis. We find that FVOL adopters exhibit ex post negative abnormal returns. Moreover, we find that financially vulnerable firms are more likely to adopt the FVOL and that adopters are more likely to receive TARP bailout funds. These results suggest that FVOL adoption reveals information not priced by markets at the time of adoption, and that regulators and investors ought to better utilize private information revealed through financial reporting options.

Suggested Citation

  • Couch, Robert & Wu, Wei, 2016. "The fair value option for liabilities and stock returns during the financial crisis," The Quarterly Review of Economics and Finance, Elsevier, vol. 59(C), pages 83-98.
    • Handle: RePEc:eee:quaeco:v:59:y:2016:i:c:p:83-98
    DOI: 10.1016/j.qref.2015.06.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1062976915000617
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.qref.2015.06.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Acharya, Viral V. & Pedersen, Lasse Heje, 2005. "Asset pricing with liquidity risk," Journal of Financial Economics, Elsevier, vol. 77(2), pages 375-410, August.
    2. Huizinga, Harry & Laeven, Luc, 2012. "Bank valuation and accounting discretion during a financial crisis," Journal of Financial Economics, Elsevier, vol. 106(3), pages 614-634.
    3. Asli Demirguc-Kunt & Enrica Detragiache & Ouarda Merrouche, 2013. "Bank Capital: Lessons from the Financial Crisis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(6), pages 1147-1164, September.
    4. Berger, Allen N. & Bouwman, Christa H.S., 2013. "How does capital affect bank performance during financial crises?," Journal of Financial Economics, Elsevier, vol. 109(1), pages 146-176.
    5. Markus K. Brunnermeier & Lasse Heje Pedersen, 2009. "Market Liquidity and Funding Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 22(6), pages 2201-2238, June.
    6. Blasko, Matej & Sinkey, Joseph Jr., 2006. "Bank asset structure, real-estate lending, and risk-taking," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(1), pages 53-81, February.
    7. Alexander Bleck & Xuewen Liu, 2007. "Market Transparency and the Accounting Regime," Journal of Accounting Research, Wiley Blackwell, vol. 45(2), pages 229-256, May.
    8. John Y. Campbell & Jens Hilscher & Jan Szilagyi, 2008. "In Search of Distress Risk," Journal of Finance, American Finance Association, vol. 63(6), pages 2899-2939, December.
    9. Lee J. Cohen & Marcia Millon Cornett & Alan J. Marcus & Hassan Tehranian, 2014. "Bank Earnings Management and Tail Risk during the Financial Crisis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(1), pages 171-197, February.
    10. David Aboody & Mary E. Barth & Ron Kasznik, 2004. "Firms' Voluntary Recognition of Stock‐Based Compensation Expense," Journal of Accounting Research, Wiley Blackwell, vol. 42(2), pages 123-150, May.
    11. Francis A. Longstaff & Sanjay Mithal & Eric Neis, 2005. "Corporate Yield Spreads: Default Risk or Liquidity? New Evidence from the Credit Default Swap Market," Journal of Finance, American Finance Association, vol. 60(5), pages 2213-2253, October.
    12. Fahlenbrach, Rüdiger & Stulz, René M., 2011. "Bank CEO incentives and the credit crisis," Journal of Financial Economics, Elsevier, vol. 99(1), pages 11-26, January.
    13. Jin, Li & Myers, Stewart C., 2006. "R2 around the world: New theory and new tests," Journal of Financial Economics, Elsevier, vol. 79(2), pages 257-292, February.
    14. Hassan, M. Kabir, 1993. "The off-balance sheet banking risk of large U.S. commercial banks," The Quarterly Review of Economics and Finance, Elsevier, vol. 33(1), pages 51-69.
    15. Kim, Jeong-Bon & Li, Yinghua & Zhang, Liandong, 2011. "CFOs versus CEOs: Equity incentives and crashes," Journal of Financial Economics, Elsevier, vol. 101(3), pages 713-730, September.
    16. Efraim Benmelech & Eugene Kandel & Pietro Veronesi, 2010. "Stock-Based Compensation and CEO (Dis)Incentives," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 125(4), pages 1769-1820.
    17. Hui Tong & Shang-Jin Wei, 2011. "The Composition Matters: Capital Inflows and Liquidity Crunch During a Global Economic Crisis," The Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 2023-2052.
    18. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    19. Chava, Sudheer & Purnanandam, Amiyatosh, 2011. "The effect of banking crisis on bank-dependent borrowers," Journal of Financial Economics, Elsevier, vol. 99(1), pages 116-135, January.
    20. Longstaff, Francis A. & Santa-Clara, Pedro & Schwartz, Eduardo S., 2001. "Throwing away a billion dollars: the cost of suboptimal exercise strategies in the swaptions market," Journal of Financial Economics, Elsevier, vol. 62(1), pages 39-66, October.
    21. Gaynor, Lisa Milici & McDaniel, Linda & Yohn, Teri Lombardi, 2011. "Fair value accounting for liabilities: The role of disclosures in unraveling the counterintuitive income statement effect from credit risk changes," Accounting, Organizations and Society, Elsevier, vol. 36(3), pages 125-134, April.
    22. De Bondt, Werner F M & Thaler, Richard H, 1987. "Further Evidence on Investor Overreaction and Stock Market Seasonalit y," Journal of Finance, American Finance Association, vol. 42(3), pages 557-581, July.
    23. Hutton, Amy P. & Marcus, Alan J. & Tehranian, Hassan, 2009. "Opaque financial reports, R2, and crash risk," Journal of Financial Economics, Elsevier, vol. 94(1), pages 67-86, October.
    24. Dinara Bayazitova & Anil Shivdasani, 2012. "Assessing TARP," The Review of Financial Studies, Society for Financial Studies, vol. 25(2), pages 377-407.
    25. Vayanos, Dimitri, 2004. "Flight to quality, flight to liquidity, and the pricing of risk," LSE Research Online Documents on Economics 456, London School of Economics and Political Science, LSE Library.
    26. Barber, Brad M. & Lyon, John D., 1997. "Detecting long-run abnormal stock returns: The empirical power and specification of test statistics," Journal of Financial Economics, Elsevier, vol. 43(3), pages 341-372, March.
    27. De Bondt, Werner F M & Thaler, Richard, 1985. "Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
    28. Guidry, Flora & J. Leone, Andrew & Rock, Steve, 1999. "Earnings-based bonus plans and earnings management by business-unit managers1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 113-142, January.
    29. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 31(3), pages 129-137.
    30. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    31. repec:bla:jfinan:v:59:y:2004:i:2:p:831-868 is not listed on IDEAS
    32. Jeong†Bon Kim & Liandong Zhang, 2014. "Financial Reporting Opacity and Expected Crash Risk: Evidence from Implied Volatility Smirks," Contemporary Accounting Research, John Wiley & Sons, vol. 31(3), pages 851-875, September.
    33. Cornett, Marcia Millon & Marcus, Alan J. & Tehranian, Hassan, 2008. "Corporate governance and pay-for-performance: The impact of earnings management," Journal of Financial Economics, Elsevier, vol. 87(2), pages 357-373, February.
    34. repec:bla:jfinan:v:53:y:1998:i:1:p:403-416 is not listed on IDEAS
    35. John D. Lyon & Brad M. Barber & Chih‐Ling Tsai, 1999. "Improved Methods for Tests of Long‐Run Abnormal Stock Returns," Journal of Finance, American Finance Association, vol. 54(1), pages 165-201, February.
    36. S. P. Kothari & Susan Shu & Peter D. Wysocki, 2009. "Do Managers Withhold Bad News?," Journal of Accounting Research, Wiley Blackwell, vol. 47(1), pages 241-276, March.
    37. Egly, Peter V. & Sun, Jun, 2014. "Trading income and bank charter value during the financial crisis: Does derivatives dealer designation matter?," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(3), pages 355-370.
    38. Sreedhar T. Bharath & Tyler Shumway, 2008. "Forecasting Default with the Merton Distance to Default Model," The Review of Financial Studies, Society for Financial Studies, vol. 21(3), pages 1339-1369, May.
    39. Conrad, Jennifer & Kaul, Gautam, 1993. "Long-Term Market Overreaction or Biases in Computed Returns?," Journal of Finance, American Finance Association, vol. 48(1), pages 39-63, March.
    40. Dechow, Patricia M. & Myers, Linda A. & Shakespeare, Catherine, 2010. "Fair value accounting and gains from asset securitizations: A convenient earnings management tool with compensation side-benefits," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 2-25, February.
    41. Healy, Paul M., 1985. "The effect of bonus schemes on accounting decisions," Journal of Accounting and Economics, Elsevier, vol. 7(1-3), pages 85-107, April.
    42. Healy, Paul M. & Palepu, Krishna G., 2001. "Information asymmetry, corporate disclosure, and the capital markets: A review of the empirical disclosure literature," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 405-440, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Andreou, Christoforos K. & Andreou, Panayiotis C. & Lambertides, Neophytos, 2021. "Financial distress risk and stock price crashes," Journal of Corporate Finance, Elsevier, vol. 67(C).
    2. Ahsan Habib & Mostafa Monzur Hasan & Haiyan Jiang, 2018. "Stock price crash risk: review of the empirical literature," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(S1), pages 211-251, November.
    3. Gu, Xiaolong & Xin, Yu & Xu, Liping, 2019. "Expected stock price crash risk and bank loan pricing: Evidence from China's listed firms," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    4. Chen, Yangyang & Fan, Qingliang & Yang, Xin & Zolotoy, Leon, 2021. "CEO early-life disaster experience and stock price crash risk," Journal of Corporate Finance, Elsevier, vol. 68(C).
    5. Chowdhury, Hasibul & Hodgson, Allan & Pathan, Shams, 2020. "Do external labour market incentives constrain bad news hoarding? The CEO's industry tournament and crash risk reduction," Journal of Corporate Finance, Elsevier, vol. 65(C).
    6. Zhuo, Qianru & Lin, Yuanfeng & Qiu, Yajie & Shen, Zhe & Wang, Zhiqiang, 2024. "Employment protection and stock price crash risk: Evidence from China’s introduction of the labor contract law," Research in International Business and Finance, Elsevier, vol. 71(C).
    7. Lin, Tse-Chun & Liu, Jinyu & Ni, Xiaoran, 2022. "Foreign bank entry deregulation and stock market stability: Evidence from staggered regulatory changes," Journal of Empirical Finance, Elsevier, vol. 69(C), pages 185-207.
    8. Jincheol Bae & Jaehong Lee & Eunsoo Kim, 2019. "Does Fixed Asset Revaluation Build Trust between Management and Investors?," Sustainability, MDPI, vol. 11(13), pages 1-22, July.
    9. Bing Wang & Kung‐Cheng Ho & Xinyu Liu & Yan Gu, 2022. "Industry cash flow volatility and stock price crash risk," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 43(2), pages 356-371, March.
    10. Min Jung Kang & Y. Han (Andy) Kim & Qunfeng Liao, 2020. "Do bankers on the board reduce crash risk?," European Financial Management, European Financial Management Association, vol. 26(3), pages 684-723, June.
    11. Yi Si & Chongwu Xia, 2023. "The Effect of Human Capital on Stock Price Crash Risk," Journal of Business Ethics, Springer, vol. 187(3), pages 589-609, October.
    12. Xu, Nianhang & Li, Xiaorong & Yuan, Qingbo & Chan, Kam C., 2014. "Excess perks and stock price crash risk: Evidence from China," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 419-434.
    13. Chen, Changling & Kim, Jeong-Bon & Yao, Li, 2017. "Earnings smoothing: Does it exacerbate or constrain stock price crash risk?," Journal of Corporate Finance, Elsevier, vol. 42(C), pages 36-54.
    14. Panayiotis C. Andreou & Constantinos Antoniou & Joanne Horton & Christodoulos Louca, 2016. "Corporate Governance and Firm†specific Stock Price Crashes," European Financial Management, European Financial Management Association, vol. 22(5), pages 916-956, November.
    15. Skočir, Matevž & Lončarski, Igor, 2018. "Multi-factor asset pricing models: Factor construction choices and the revisit of pricing factors," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 55(C), pages 65-80.
    16. Choi, Young Mok & Park, Kunsu, 2022. "Zero-leverage policy and stock price crash risk: Evidence from Korea," International Review of Financial Analysis, Elsevier, vol. 81(C).
    17. Jin, Hong-min & Su, Zhong-qin & Wang, Lu & Xiao, Zuoping, 2022. "Do academic independent directors matter? Evidence from stock price crash risk," Journal of Business Research, Elsevier, vol. 144(C), pages 1129-1148.
    18. Lu, Xian-wei & Fung, Hung-Gay & Su, Zhong-qin, 2018. "Information leakage, site visits, and crash risk: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 58(C), pages 487-507.
    19. Chen Chen & Ting‐Chiao Huang & Mukesh Garg & Mehdi Khedmati, 2021. "Governments as customers: Exploring the effects of government customers on supplier firms’ information quality," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(9-10), pages 1630-1667, October.
    20. Chwee Ming Tee & Angelina Seow Voon Yee & Aik Lee Chong, 2018. "Institutional Investors’ Monitoring and Stock Price Crash Risk: Evidence from Politically Connected Firms," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 21(04), pages 1-35, December.

    More about this item

    Keywords

    Stock returns; Financial institutions; Financial crisis; Adverse selection; Credit risk; Fair value option; SFAS 159;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:quaeco:v:59:y:2016:i:c:p:83-98. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/620167 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.