serval:BIB_73E957DB921B
Preserving Amortized Costs within a Fair-Value-Accounting Framework: Reclassification of Gains and Losses on Available-for-Sale Securities upon Realization
10.1007/s11142-013-9246-7
000331831900008
http://link.springer.com/journal/11142
Dong
M.
author
Ryan
S.G.
author
Zhang
X.-J.
author
article
2014-03
Review of Accounting Studies
1380-6653
journal
19
1
242-280
Abstract SFAS No. 115 requires firms to recognize available-for-sale (AFS) securities at fair value with accumulated unrealized gains and losses (AUGL) recorded in accumulated other comprehensive income. Firms reclassify AUGL to net income when they realize gains and losses. We refer to the amount reclassified each period by ''RECLASS.'' As of 1998, SFAS No. 130 requires firms to present RECLASS prominently in their financial statements. We investigate the incremental explanatory power of RECLASS for banks' market values and market-adjusted returns. In the market value analysis, we control for AUGL, other components of book value of equity, net income before extraordinary items and RECLASS (NIBEXother), and other components of comprehensive income. In the returns analysis, we control for DAUGL, DNIBEXother, and extraordinary items. We find high positive coefficients on RECLASS in both analyses, consistent with investors pricing RECLASS as a relatively permanent component of net income. Exploring possible explanations for these pricing implications, we find no evidence that they are attributable to RECLASS remedying unreliable fair value measurement of AUGL. We provide three distinct analyses indicating that RECLASS's pricing implications are explained in significant part by it helping investors predict banks' future performance. Our results illustrate that an important type of amortized cost accounting information, realized gains and losses, remains highly useful to investors despite the overall fair-value-accounting framework for AFS securities.
Available-for-sale securities
Reclassification
Fair value accounting
Realization
eng
60_published
peer-reviewed
University of Lausanne
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