Fair value reclassifications of financial assets during the financial crisis

摘要

This study examines whether reclassifications of financial assets out of fair value categories during a market downturn are associated with regulatory benefits and informational costs. We find that the severity of regulatory capital restrictions and the lack of prudential filters for unrealized fair value changes are positively associated with a bank’s reclassification choice. For a small group of banks that have a high reclassification likelihood and the greatest need for additional regulatory capital, we observe a positive stock market reaction around the announcement of the new accounting option. For another group of banks that were initially not expected to reclassify, we find that abnormal stock returns around the announcement of the accounting choice increase in the regulatory capital effect of the reclassification. Finally, we document a positive association between banks’ bid-ask spreads and the reclassification choice for those banks that do not provide complete IFRS 7 disclosures about the unrecognized fair value changes.