An empirical analysis of the economic implications of fair value accounting for investment securities

Abstract

This paper analyzes security returns of bank holding companies and insurance companies during periods surrounding the adoption of SFAS 115. We find bank share prices were negatively affected by the examined events, but find little share price reaction for insurance companies. Our evidence suggests banks were adversely affected by the standard because of problems with the standard's market value accounting approach. Cross-sectional analysis of event period returns shows that banks that more frequently traded their investments, with longer maturing investments, and that are more fully hedged against interest rate changes, were the most negatively impacted by the standard.