SFAS No. 159: An examination of early electors, late electors and non‐electors in the banking industry

Abstract

Purpose

The purpose of this paper is to examine the timing and the determinants of electing Statement of Financial Accounting Standard (SFAS) No. 159 in the banking industry.

Design/methodology/approach

The authors hypothesize certain factors that will potentially affect banks' election decisions and separate banks into three groups: early electors, late electors and non‐electors by hand‐collecting the election decisions and the timing of the election decisions. Univariate and logit rank regressions are used to identify the determining factors between electors (vs non‐electors) and between early electors (vs late electors).

Findings

The authors find that compared to banks not electing SFAS No. 159 (non‐electors), banks electing SFAS No. 159 (early electors as well as late electors) face greater earnings pressures, have less volatile earnings and larger size, and are active in hedging activities. In addition, compared to banks electing SFAS No. 159 at required election date (late electors), banks electing SFAS No. 159 early (early electors) have weak financial strength, less volatile earnings, and are more likely to be audited by non‐Big‐4 auditors.

Research limitations/implications

The study only focuses on the banking industry, so the results from may not be generalized to other industries. Future studies could explore how SFAS No. 159 impacts firms in different industries.

Originality/value

The authors' overall results suggest that the banks might have many considerations in mind when they elect to use SFAS No. 159. The results provide useful information for regulatory bodies to evaluate the efficacy of issuing the standard. Early electors could have exploited the opportunities provided by the transition provisions of this standard to boost their regulatory capital ratios.

Citation

Xu, L. and Tang, A. (2011), "SFAS No. 159: An examination of early electors, late electors and non‐electors in the banking industry", Review of Accounting and Finance, Vol. 10 No. 2, pp. 92-109. https://doi.org/10.1108/14757701111129599