Does it matter who serves on the Financial Accounting Standards Board? Bob Herz’s resignation and fair value accounting for loans

Abstract

Despite the perceived importance of accounting standard setters, it remains unknown whether and how much individual FASB board members can influence specific accounting policies because it is difficult to measure any board member’s impact during the process of accounting standard setting absent an exogenous shock. In this study we utilize a unique setting to answer this question. On August 24, 2010, the then FASB chairman Bob Herz resigned unexpectedly. Prior to his resignation, he had supported a highly contested accounting proposal on fair value on bank loans. Earlier in May Herz cast the deciding vote for the FASB to propose applying fair value to bank loans, causing strong pushbacks from banks and bank regulators. We examine whether Herz’s abrupt resignation changes the market’s expectation on whether the fair value proposal would be finalized. We find that banks responded positively to Herz’s resignation, more so for banks that would be affected more. They also responded negatively when the FASB first proposed the fair value requirement and positively when the FASB later dropped it. Our results indicate that the stock markets believe that Herz’s position is crucial in affecting the direction of the fair value accounting for bank loans. Our study provides initial evidence of a single FASB board member’s influence on accounting policymaking.