Accounting Policy Choice During the Financial Crisis: Evidence From Adoption of the Fair Value Option

摘要

We examine banks' accounting policy choices during the financial crisis where they are strongly motivated to manage earnings or regulatory capital. We address the issue via the initial elections of the fair value option (FVO) under SFAS No. 159, which provides considerable latitude and in particular its transition guidance is amenable to exploitation. We investigate banks' reasons to elect the FVO and provide evidence regarding whether and how these reasons differed for banks adopting the standard in the first quarter of 2007 (early adopters) versus first quarter of 2008 (regular adopters). We predict and find that early adopters with histories of managing accounting numbers were more likely to make opportunistic FVO elections, and we show that early adopters with low capital tended to exploit the FVO in the opposite direction as those with high capital. With intense regulatory scrutiny since April 2007, we predict and find that regular adopters' FVO elections complied with SFAS No. 159's intent. We further analyze the particular reasons why early and regular adopters most commonly elected the FVO for specific types of financial instruments. We find that early adopters' elections for available-for-sale (AFS) securities and debt reflected opportunism, and regular adopters' elections for loans held for sale reflected compliance with the standard's intent to remedy accounting mismatches for economic hedges.