Information Asymmetry and Voluntary SFAS 157 Fair Value Disclosures by Bank Holding Companies During the 2007 Financial Crisis

We hand‐collect SFAS 157 voluntary fair value disclosures of 18 bank holding companies. The SEC's Division of Corporate Finance likely targeted these entities in 2008 through their “Dear CFO” letters in which they requested specific, additional disclosure items. We collect disclosures that match the SEC recommendations and create eight common factor disclosure variables to examine the effect of such disclosures on information asymmetry. We find that disclosure variables about the use of broker quotes or prices from pricing services and the use of market indices and illiquidity adjustments are related to lower information asymmetry. However, disclosure variables about valuation techniques and asset‐backed securities are related to greater information asymmetry. We also document that disclosure complexity, and disclosure tone (uncertainty and litigious) is related to greater information asymmetry. These findings are consistent with criticism that corporate disclosures are voluminous; management may obfuscate unfavorable information which in turn increases market participants’ assessment of uncertainty associated with the fair value measures. We caveat that the setting of the financial crisis and a small sample size may limit the ability to generalize these inferences to other time periods or other financial firms.     

Audit Committee Financial Expertise,Litigation Risk,and Auditor‐Provided Tax Services*

The Sarbanes‐Oxley Act (SOX) greatly expanded audit committees' oversight responsibilities by requiring that they preapprove all non‐prohibited non‐audit services (NAS). Using data from 2003 to 2011, we find that tax NAS are significantly lower when accounting financial experts (ACT‐FEs) serve on the audit committee, suggesting that ACT‐FEs consider auditor independence risk, perceived and/or real, more than other members, including supervisory experts, to the point of not accepting any tax NAS, not even compliance. However, in firms with higher ex ante litigation risk, ACT‐FEs approve relatively more tax NAS than other members, suggesting that they accept the costs of a perceived lack of auditor independence from tax NAS in return for the potential benefits of increased financial reporting quality arising from tax NAS. Our analysis by subperiod (2003–2006 vs. 2007–2011) shows that this result is significant only in the second period. ACT‐FEs' differential evaluation of the trade‐off between the benefits and costs of joint audit and tax NAS provision between the two periods suggests the need for additional research in later post‐SOX years.