Online from: 2007
Subject Area: Accounting and Finance
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|Title:||Do US commercial banks use FAS 157 to manage earnings?|
|Author(s):||Gin Chong, (College of Business, Prairie View A&M University, Prairie View, Texas, USA), Henry Huang, (College of Business, Prairie View A&M University, Prairie View, Texas, USA), Yi Zhang, (College of Business, Prairie View A&M University, Prairie View, Texas, USA)|
|Citation:||Gin Chong, Henry Huang, Yi Zhang, (2012) "Do US commercial banks use FAS 157 to manage earnings?", International Journal of Accounting and Information Management, Vol. 20 Iss: 1, pp.78 - 93|
|Keywords:||Accounting standards, Commercial banks, Earnings management, Fair value measurements, FAS 157, Finance, Performance, Provision for loan losses, United States of America|
|Article type:||Research paper|
|DOI:||10.1108/18347641211201090 (Permanent URL)|
|Publisher:||Emerald Group Publishing Limited|
Purpose – The purpose of this paper is to examine whether commercial banks manage earnings through their use of Level 3 valuation under The Statement of Financial Accounting Standards No. 157 (FAS 157),
Design/methodology/approach – The authors extract information from all the 10Q-reports submitted by the US commercial banks (SEC Code 6021) for the first two quarters of 2008. Since Level 3 input is subject to the highest level of managerial discretion, this is expected to be an avenue for earnings management. Multivariate regression was applied to test whether the banks' performance and size are associated with a higher level of Level 3 input.
Findings – Out of 329 quarterly bank observations, the authors find large banks and poor performing banks with lower returns on assets, lower cash flows, and higher amounts of provision for loan losses, use more Level 3 inputs on valuing their assets and liabilities.
Research limitations/implications – The results suggest that US commercial banks use FAS157 as an avenue for earnings management. The results have implications for the accounting standard setters, banking sector and policy decision makers.
Originality/value – This is the first paper providing evidence that banks use fair value measurements to manipulate earnings.
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