The association between fair value measurements and banks' discretionary accounting choices |
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| Institution: | 1. School of Accounting, College of Business Administration, Florida International University, USA;2. Accounting Department, College of Business, San Francisco State University, USA;3. Department of Accounting, Finance and Economics, College of Business and Public Policy, California State University, Dominguez Hills, USA;1. Binghamton University – SUNY, USA;2. The Ohio State University, USA;1. School of Accounting, Central Michigan University, Mount Pleasant, MI, United States;2. Department of Accounting, College of Business, Iowa State University, Ames, IA, United States;3. Department of Accounting, Belk College of Business, University of North Carolina, Charlotte, NC, United States;4. Department of Accounting, University of Illinois, Chicago, IL, United States;1. University of Gävle, Högskolan i Gävle, 801 76 Gävle, Sweden;2. Mid Sweden University, Department of Business, Economics and Law, Centre for Research on Economic Relations, SE-851 70 Sundsvall, Sweden;3. West Virginia University, Department of Accounting, PO Box 6025, 1601 University Avenue, Morgantown, WV 26506-6025, USA;1. School of Administrative Studies, York University, 4700 Keele Street, Toronto, Ontario M3J1P3, Canada;2. School of Business, University of Alabama in Huntsville, 301 Sparkman Drive, Huntsville, AL, United States |
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| Abstract: | This study examines the association between fair value measurements and banks' discretionary loan loss provisions using regulatory financial data from 2009 to 2016 for a sample of U.S. public bank holding companies. I find that banks recognizing larger proportions of fair value assets and liabilities based on level 2 and level 3 inputs are associated with lower discretionary loan loss provisions. However, there is no significant association between level 1 fair value assets and liabilities and discretionary loan loss provisions. When pre-managed earnings are lower, banks with larger proportions of level 2 and level 3 fair value assets and liabilities report smaller discretionary loan loss provisions to inflate earnings. Banks reporting larger proportions of level 2 and level 3 fair value assets and liabilities are more likely to use discretionary loan loss provisions to beat earnings benchmarks and manage tier one capital ratios. Overall, the results support the proposition that fair value assets and liabilities based on level 2 and level 3 inputs are less transparent and are subject to more discretion regarding loan loss provisions. |
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