Missed Distress Signals: Evidence from the Fair Value Option for Liabilities

• In Event: Financial Institutions and Fair Value Accounting

Abstract

We investigate how the market could have identified financially vulnerable firms earlier in the financial crisis through a transparent signal linked to credit risk. We find that adopters of the fair value option for liabilities (FVOL) exhibit ex post negative abnormal returns. We also find that financially vulnerable firms are more likely to adopt the FVOL and that adopters are more likely to receive TARP bailout funds. Accordingly, we argue that FVOL adoption reveals information not priced by markets at the time of adoption, and that regulators and investors ought to better utilize private information revealed through financial reporting options.

Authors

• Wei Wu, Willamette University

• Nicole Thibodeau, Willamette University

• Robert Couch, Willamette University