On the relation between the fair value option and bid-ask spreads: descriptive evidence on the recognition of credit risk changes under IFRS

Abstract

This paper investigates the relationship between the use of the fair value option for liabilities (FVO) under IAS 39 and information asymmetry across investors as reflected in bid-ask spreads. Using a sample of European banks for 2006–2010, we find descriptive evidence that banks using FVO exhibit lower bid-ask spreads, relative to non-adopters. We also document that lower bid-ask spreads are still present when the control group of non-adopters is held constant while the treatment group is reduced to adopters that recognise fair value changes attributable to own credit risk changes. Moreover, the comparison of adopters with own credit risk fair value changes to other adopters shows that the recognition of these fair values is not associated with higher bid-ask spreads. Stressing the limitations of our research and highlighting the existence of alternative plausible explanations, our findings appear not to support claims that recognising fair value changes attributable to changes in the own credit risk is detrimental to the transparency of financial statements.