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Fair Value Liabilities: An Option for Lemons?

Sat, April 27, 10:25 to 11:40am, Hyatt Fisherman's Wharf, TBA

Abstract

Embedded in SFAS No. 159 is a fair value option for liabilities (FVOL) that has swaption-like characteristics. This gives financially vulnerable firms a strategic incentive to adopt the FVOL. Accordingly, we find that: (1) expected default risk, estimated using publicly available information, is a significant predictor of FVOL adoption; (2) FVOL adopters exhibit lower post-adoption abnormal stock returns; (3) FVOL adopters are more likely to have received TARP bailout funds. Moreover, findings (2) and (3) are significant after controlling for publicly available information prior to adoption, evidence that managers of lemon firms act on private information.

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