Relevance of fair value disclosures in Spanish credit institutionsrelevancia de la información sobre el valor razonable en las entidades de crédito españolas

  1. Delgado-Vaquero, David 1
  2. Morales-Díaz, José 2
  3. Villacorta, Miguel A. 2
  1. 1 Market Risk Team (Financial Services Office), Ernst & Young, Madrid-SPAIN.
  2. 2 Financial Administration and Accounting Department, Faculty of Business and Economics, Complutense University of Madrid, Madrid-SPAIN.
Journal:
Revista de contabilidad = Spanish accounting review: [RC-SAR]

ISSN: 1138-4891

Year of publication: 2022

Volume: 25

Issue: 2

Pages: 175-189

Type: Article

DOI: 10.6018/RCSAR.431971 DIALNET GOOGLE SCHOLAR lock_openDIGITUM editor

More publications in: Revista de contabilidad = Spanish accounting review: [RC-SAR]

Abstract

Spanish quoted credit institutions have applied IFRS for their consolidated financial statements since 2005. IFRS implied the implementation of the fair value measurement model for a greater number of financial instruments than previously, as well as the disclosure of the difference between fair value and book value for those financial instruments not measured at fair value on the balance sheet. In line with the value relevance literature, and through the application of an Ohlson model, we have analyzed whether fair value disclosures contribute to explaining the difference between the equity book value and the equity market value of the sample entities. We have modeled several variables related to the possible goodwill of the entities in order to increase the model’s explanatory power. Our paper is the first to focus exclusively on Spanish quoted credit institutions as well as to use an ample timeframe which includes pre-crisis, crisis and post-crisis periods (2004 to 2019). The results show that, generally speaking (and in contrast to previous studies focused on other regions), fair value disclosures within the sample entities are not relevant for investors. There are several possible explanations for these results which are related to the specific characteristics of Spanish credit institutions and to the time period utilized for the sample. Conversely, entity size was found to have a statistically significant impact on the value-relevance of the goodwill explanatory factors.

Bibliographic References

  • Ahmed, A.S., Kilic, E., & Lobo, G. (2006). Does Recognition Versus Disclosure Matter? Evidence From Value-Relevance of Banks' Recognized and Disclosed Derivative Financial Instruments. The Accounting Review, 81 (3), 567-588. https://doi.org/10.2308/accr.2006.81.3.567
  • Altamuro, J., & Zhang, H. (2013). The financial reporting of fair value based on managerial inputs versus market inputs: evidence from mortgage servicing rights. Review of Accounting Studies, 18 (3), 833-858. https://doi.org/10.1007/s11142-013-9234-y
  • Amel-Zadeh, A., Barth, M. E., & Landsman, W. R. (2017). The Contribution of Bank Regulation and Fair Value Accounting to Procyclical Leverage. Review of Accounting Studies, 22, 1423-1454. https://doi.org/10.1007/s11142-017-9410-6.
  • Aurori, M.H., Bellalah, N.H., & Nguyem, D.K. (2012). Relevance of Fair Value Accounting for Financial Instruments: Some French Evidence. International Journal of Business, 17(2), 209-220.
  • Barth, M.E. (1994). Fair Value Accounting: Evidence from Investment Securities and the Market Valuation of Banks. The Accounting Review, 69 (1), 1-25. https://www.jstor.org/stable/248258
  • Barth, M. E., W. R. Landsman, and J. M. Wahlen (1995). Fair Value Accounting: Effects on Banks' Earnings Volatility, Regulatory Capital, and Value of Contractual Cash Flows. Journal of Banking and Finance, 19 (3-4), 577-605. https://doi.org/10.1016/0378-4266(94)00141-O
  • Barth, M.E., Beaver, W.H., & Landsman, W.R. (1996). Value-Relevance of Bank's Fair Value Disclosures under SFAS No. 107. The Accounting Review, 71 (4), 513 - 537. https://www.jstor.org/stable/248569
  • Barth, M. E., Beaver, W. H., & Landsman W. R. (2001). The relevance of the value relevance literature for financial accounting standard setting: another view. Journal of Accounting and Economics, 31 (1), 77-104. https://doi.org/10.1016/S0165-4101(01)00019-2
  • Beatty, A., & Liao, S. (2014). Financial accounting in the banking industry: A review of the empirical literature. Journal of Accounting and Economics, 58 (2-3), 339-383. https://doi.org/10.1016/j.jacceco.2014.08.009
  • Begley, J., Chamberlain, S.L., & Li, Y. (2010). Modeling Goodwill for Banks: A Residual Income Approach with Empirical Tests. Contemporary Accounting Research, 23 (1), 31 - 68. https://doi.org/10.1506/dvwu-bwtw-b018-lmta
  • Biddle, G. C., Seow G. S., and Siegel A. F. (1995). Relative Versus Incremental Information Content. Contemporary Accounting Research, 12 (1): 1-23. https://doi.org/10.1111/j.1911-3846.1995.tb00478.x
  • Bosch, P. (2012). Value Relevance of the Fair Value Hierarchy of IFRS 7 in Europe - How reliable are mark-to-model Fair Values? Working Paper, University of Freiburg. https://doc.rero.ch/record/30782/files/WP_SES_439.pdf
  • Brickner, D. R. (2003). An Analysis of Factors Impacting the Value-Relevance of SFAS No. 107 Fair Value Disclosures. Journal of Business & Economics Research, 1 (4). https://doi.org/10.19030/jber.v1i4.2995.
  • Burgstahler, D. C., Hail, L. & Leuz, C. (2006). The Importance of Reporting Incentives: Earnings Management in European Private and Public Firms. The Accounting Review, 81 (5), 983-1016. https://doi.org/10.2308/accr.2006.81.5.983
  • Bushman, R.M., & Smith, A.J. (2001). Financial accounting information and corporate governance. Journal of Accounting and Economics, 32 (1-3), 237-333. https://doi.org/10.1016/S0165-4101(01)00027-1.
  • Cairns, D. (2006). The Use of Fair Value in IFRS. Accounting in Europe, 3 (1), 5-22. https://doi.org/10.1080/09638180600920053.
  • Davis-Friday, P.Y., Chao-Shin, L., & Mittelstaedt, F. (2004). Recognition and Disclosure Reliability: Evidence From SFAS No. 106. Contemporary Accounting Research, 21(2), 399-429. https://doi.org/10.2139/ssrn.247369
  • Drago, D., Mazzuca, M., & Trina, R. (2013). Do loans fair value affect market value? Evidence from European banks. Journal of Financial Regulation and Compliance, 21(2), 108-120. https://doi.org/10.1108/13581981311315532
  • Evans, M.E., Hodder, L., & Hopkins, P.E. (2014). The Predictive Ability of Fair Values for Future Financial Performance of Commercial Banks and the Relation of Predictive Ability to Banks' Share Prices. Contemporary Accounting Research, 31(1), 13-44. https://doi.org/10.1111/1911-3846.12028
  • Fiechter, P. (2011). Reclassification of Financial Assets under IAS 39: Impact on European Banks' Financial Statements. Accounting in Europe, 8 (1), 49-67. https://doi.org/10.1080/17449480.2011.574409
  • Fiechter, P., & Novotny-Farkas, Z. (2017). The impact of the institutional environment on the value relevance of fair values. Review of Accounting Studies, 22 (1), 392-429. https://doi.org/10.1007/s11142-016-9378-7
  • Fogarty, T.J., Mohamed, E.A.H., & Edward, K.J. (1994). Political aspects of financial accounting standard setting in the USA. Accounting, Auditing and Accountability Journal, 7 (4), 24-46. https://doi.org/10.1016/j.adiac.2010.02.001
  • Freeman, W., Wells, P., & Wyatt, A. (2017). Measurement Model or Asset Type: Evidence from an Evaluation of the Relevance of Financial Assets. Abacus, 53 (2), 180-210. https://doi.org/10.1111/abac.12108
  • Frii, P. (2011). On the Value Relevance of Banks' Valuation of Goodwill in Times of Financial Turmoil. Retrieved from: https://core.ac.uk/reader/16330450
  • Ghio, A., Filip, A., & Jeny, A. (2018). Fair Value Disclosures and Fair Value Hierarchy: Literature Review on the Implementation of IFRS 13 and SFAS 157. ANC (Autorité des Normes Comptables) Policy Paper. https://doi.org/10.13140/RG.2.2.11458.43208.
  • Giner, B., Allini, A., & Zampella (2020). The Value Relevance of Risk Disclosure: An Analysis of the Banking Sector. Accounting in Europe, 17(2), 129-157. https://doi.org/10.1080/17449480.2020.1730921
  • Giner, B., & Mora, A. (2020). The Value Relevance of Risk Disclosure: An Analysis of the Banking Sector. Accounting in Europe, 17(2), 129-157. https://doi.org/10.1080/17449480.2020.1730921.
  • Giner, B., & Mora, A. (2020). Political interference in private entities' financial reporting and the public interest: evidence from the Spanish financial crisis. Accounting, Auditing & Accountability Journal, 34(7), 1581-1607. https://doi.org/10.1108/AAAJ-11-2019-4271
  • Goh, B. W., Li, D., Ng, J., & Yong, K.O. (2015). Market pricing of banks' fair value assets reported under SFAS 157 since the 2008 financial crisis. Journal of Accounting and Public Policy, 34(2), 129-145. https://doi.org/10.1016/j.jaccpubpol.2014.12.002
  • Holthausen, R. W., & R. L. Watts. (2001). The relevance of the value-relevance literature for financial accounting standard setting. Journal of Accounting & Economics, 31 (1-3), 3-75. https://doi.org/10.1016/S0165-4101(01)00029-5
  • Isidro, H., & Grilo, D. (2011). Value-Driving Activities in Euro-Zone Banks. European Accounting Review, 21 (2), 297-341. https://doi.org/10.1080/09638180.2011.585790
  • Kolev, K. (2019). Do investors perceive marking-to-model as marking-to-myth? Early evidence from FAS 157 disclosure. Quarterly Journal of Finance, 9 (2), 1-47. https://doi.org/10.1142/S2010139219500058
  • Königsgruber, R. (2013). Expertise-based lobbying and accounting regulation. Journal of Management and Governance, 17(4), 1009-1025. https://doi.org/10.1007/s10997-012-9210-0
  • Kusano, M. (2013). Fair Value Accounting and Procyclicality: Accounting for Securitization. Corporate Ownership and Control, 11(1-6), 535-547. https://doi.org/10.22495/cocv11i1c6art1
  • Landsman, W.R. (2007). Is Fair Value Accounting Information Relevant and Reliable? Evidence from Capital Market Research. Accounting and Business Research, 37(sup1), 19-30. https://doi.org/10.1080/00014788.2007.9730081
  • Liao, L., Kang, H., & Morris, R.D. (2020). The Value Relevance of Fair Value and Historical Cost Measurements During the Financial Crisis. Accounting and Finance, 61(S1), 2069-2107. https://doi.org/10.1111/acfi.12655
  • Ljung, M., & Box, G.E.P. (1978). On a Measure of a Lack of Fit in Time Series Models. Biometrika, 65 (2), 297-303. https://doi.org/10.1093/biomet/65.2.297
  • Maudos, J., Pastor, J.M., Pérez, F., & Quesada, J. (2002). Cost and Profit Efficiency in European Banks. Journal of International Financial Markets, Institutions and Money, 12(1), 33-58. https://doi.org/10.1016/S1042-4431(01)00051-8
  • Mora, A. (2012). Banco de España vs. NIC 39. Available at: https://www.revistaconsejeros.com/reportaje/263/banco-de-espana-vs-nic-39
  • Mora, A., McGeachin, A., Barth, M.E., Barker, R., Wagenhofer, A., & Joos, P. (2019). Fair Value Accounting: The Eternal Debate - AinE EAA Symposium, May 2018. Accounting in Europe, 16 (3), 237-255. https://doi.org/10.1080/17449480.2019.1664754
  • Moro, R. (2020). Goodwill Valuation. Chapter 17 of the book: The Valuation of Digital Intangibles. Palgrave Macmillan. https://doi.org/10.1007/978-3-030-36918-7_17
  • Morales-Díaz J., Villacorta-Hernández, M. A., & Voicila, F. I. (2019). Lease accounting: an inquiry into the origins of the Capitalization Model. De Computis - Revista Española de Historia de la Contabilidad, 16 (2), 160 - 187. https://doi.org/10.26784/issn.1886-1881.v16i2.357.
  • Mozes, H.A. (2002). The Value Relevance of Financial Institutions' Fair Value Disclosures: A Study in the Difficulty of Linking Unrealized Gains and Losses to Equity Values. Abacus, 38 (1), 1-15. https://doi.org/10.1111/1467-6281.00095
  • Müller, M. A., Riedl, E. J., & Sellhorn, T. (2015). Recognition Versus Disclosure of Fair Values. The Accounting Review, 90(6), 2411-2447. https://doi.org/10.2308/accr51044.
  • Novoa, A., Scarlata, J., & Solé, J. (2009). Procyclicality and Fair Value Accounting. IMF Working Paper. Available at: https://www.bis.org/bcbs/events/cbrworkshop09/novoascarlatasole.pdf. https://doi.org/10.5089/9781451871876.001
  • Ohlson, J.A. (1980). Financial Ratios and the Probabilistic Prediction of Bankruptcy. Journal of Accounting Research, 18 (1), 109-131. https://doi.org/10.2307/2490395
  • Ohlson, J.A. (1995). Earnings, Book Values, and Dividends in Equity Valuation. Contemporary Accounting Research, 11(2), 661-687. https://doi.org/10.1111/j.1911-3846.1995.tb00461.x
  • Padberg, T. (2017). How to Analyse Bank Financial Statements. Hampshire, UK: Harriman House.
  • Pallarés, J., Pérez, J., & Gonzalo-Angulo, J.A. (2021). Relevance of goodwill impairment: the case of European banking (2005-2015). Journal of Banking Regulation, 22, 24-38. https://doi.org/10.1057/s41261-020-00126-0
  • Ryan, S. G. (2008). Accounting in and for the subprime crisis. The Accounting Review, 83, 1605-1638. https://doi.org/10.2308/accr.2008.83.6.1605
  • Schipper, K. (2007). Required Disclosures in Financial Reports. The Accounting Review, 82(2), 301-326. https://doi.org/10.2308/accr.2007.82.2.301
  • SEC (2008). Report and Recommendations Pursuant to Section 133 of the Emergency Economic Stabilization Act of 2008: Study on Mark-To-Market Accounting. Available at: https://www.sec.gov/files/marktomarket123008.pdf
  • Siekkinen, J. (2016). Value relevance of fair values in different investor protection environments. Accounting Forum, 40(1), 1-15. https://doi.org/10.1016/j.accfor.2015.11.001
  • Siregar, D., Anandarajan, A., & Hasan, I. (2013). Commercial Banks and Value Relevance of Derivative Disclosures after SFAS 133: Evidence from the USA. Review of Pacific Basin Financial Markets and Policies, 16(1), 1-28. https://doi.org/10.1142/S0219091513500045
  • Song, C.J., Thomas, W.B., & Yi, H. (2010). Value Relevance of FAS 157 Fair Value Hierarchy Information and the Impact of Corporate Governance Mechanisms. The Accounting Review, 85 (4), 1375-1410. https://doi.org/10.2139/ssrn.1198142
  • Tama-Sweet, I., & Zhang, L. (2015). The value relevance of fair value financial assets during and after the 2008 financial crisis: evidence from the banking industry. Journal of Finance and Bank Management, 3(1), 11-24. https://doi.org/10.15640/jfbm.v3n1a2
  • Tua, J. (1990). Algunas Implicaciones del Paradigma de la Utilidad en la Disciplina Contable. Contaduría Universidad de Antioquía, 16, 16-48.
  • Wilson, A. (2001). Fair Value Measurement: Where the Conflict Lie. Balance Sheet, 9(4), 26 - 33. https://doi.org/10.1108/09657960110696735
  • Yu, K. (2013). Does Recognition versus Disclosure Affect Value Relevance? Evidence from Pension Accounting. The Accounting Review, Vol. 88 (3), 1095-1127. https://doi.org/10.2308/accr-50381
  • Zamora-Ramírez, C., & Morales-Díaz, J. (2018). The Use of Fair Value Measurement in Financial Reporting: A Literature Review. Studies of Applied Economics, 36 (2), 489-514, https://doi.org/10.25115/eea.v36i2.2540
Data source: Dialnet