Leslie D. Hodder

Fair Value Measurement in Financial Reporting

This monograph provides a historically informed discussion of conceptual and procedural issues related to the use of the fair value measurement attribute in financial reporting. Our goal is to provide a structure, based on the conceptual frameworks of the Financial Accounting Standards Board and International Accounting Standards Board, for researchers’ evaluations of empirical research studies that investigate the informational properties of all measurement bases, including fair values. We begin by defining, addressing misconceptions about, and providing a brief history of the fair value measurement 1400000030attribute. We next discuss decision usefulness of fair value and other measurement bases, and describe and evaluate examples of empirical research that documents the decision usefulness of recognized and disclosed fair value information, focusing on predictive ability, value relevance, and risk relevance.We also discuss the role of verifiability in the context of relevant and faithfully represented accounting information; describe three untested, verifiability-related maintained assumptions that arise in discussions of fair-value-measurement research; and discuss research designs for investigating questions related to accounting measurement verifiability. Finally, we discuss claims that use of the fair value measurement attribute causes procyclical behavior among financial institutions and that accounting standards have become increasingly fair-value-oriented during the last two decades.

Behavioral Implications of the SEC Market Risk Disclosures

In this paper, we draw on judgment and decision making research to examine the behavioral implications of the SECs Financial Reporting Release No. 48 on derivative and market risk disclosures. While these disclosures have been examined from an empirical point of view, no research has investigated how these disclosures might affect the users. The purpose of our paper is to identify and analyze the behavioral implications of the new risk disclosures. We draw on research done in the judgment and decision making arena to analyze the likely behavioral consequences of these disclosures. Our paper identifies a number of areas for future research on the important topic of market risk.

Usefulness of Interest Income Sensitivity Disclosures

We document multiple dimensions of usefulness of banks’ interest income sensitivity disclosures. First, we find management-generated sensitivity measures are predictive of future realized changes in net interest income. Second, we find financial analysts’ forecasts of net interest income reflect information provided by interest income sensitivity disclosures. Third, we find equity market responses to interest rate shocks as well as firms’ interest rate betas are larger for banks with greater disclosed sensitivity of net interest income to interest rate changes. Across all of these tests, the informativeness of income sensitivity measures is incremental to that of regulatory data. These results suggest that interest income sensitivity disclosures are informative measures of interest rate risk. Our results contradict assertions that these disclosures are useless due to lack of relevance of income sensitivity, poor modeling techniques, and/or redundancy relative to regulatory data.

Audits and Bank Failure: Do Financial Statement Audits Reduce Losses to Capital Providers?

We assess whether financial statement audits reduce the risk of losses to capital providers. Prior research documents a negative association between financial statement audits and perceived credit risk or interest costs, but surprisingly few studies assess whether lower perceived risk or interest costs are associated with fewer adverse risk-related operational outcomes, such as defaults. Using a sample of small, privately held commercial and savings banks subject to failure during the crisis years, and operationalizing default as failures resulting in losses to the FDIC insurance fund, we find firms having mandatory or voluntary financial statement audits are 33% to 50% less likely to experience defaults, compared to samples of unaudited firms, including samples matched on propensity to obtain an audit. These results are consistent with audited firms posing less default risk to creditors. That both mandatory and voluntary audits are negatively associated with failure after matching on other firm characteristics suggests the benefits of audits are not limited to voluntary audit regimes. Finding the presence of an audit is associated with a reduction in failure outcomes is important for regulators and other stakeholders as they weigh costs and benefits of mandatory audits.