Relevance of fair value of Brazilian banks securities in the financial crisis

Abstract

Purpose

The purpose of this paper is to seek to clarify whether the fair value (FV) of Brazilian banks securities is relevant for investors in times of crisis.

Design/methodology/approach

The information gathered for 14 quarters, 2007-2010, of a cross-sectional sample of banks was used for the purpose of explaining the value of shares based on amortized cost and the FV of securities, the book value of equity and the financial crisis. The return on shares was regressed based on the realized and unrealized gains and losses on securities, adjusted income and the crisis.

Findings

The results indicated that the FV is relevant. The results also corroborated the hypothesis that, during the crisis, there was a decrease in the relevance of the FV of securities since the accounting practices adopted in Brazil did not specify how to estimate FV, as required by SFAS 157, neither did they require disclosure of the FV hierarchy, as established International Financial Reporting Standards (IFRS) 7. It was concluded that FV has incremental explanatory power over equity, but not over amortized cost. Furthermore it possible to conclude that quarterly unrealized gains and losses on securities are not relevant, which could be explained by possible tax planning practices, since, in Brazil, the mark-to-market adjustment of securities is only deductible, or taxable, when settled. However, the realized and unrealized gains and losses are value-relevant during the period of financial crisis.

Originality/value

This study provides empirical evidence about the relevance of FV during the financial crisis in Brazil.

Citation

Chiqueto, F., Silva, R.L.M., Colossal, G. and Carvalho, L.N.G. (2015), "Relevance of fair value of Brazilian banks securities in the financial crisis", International Journal of Emerging Markets, Vol. 10 No. 4, pp. 684-696. https://doi.org/10.1108/IJoEM-11-2012-0150