Risk Relevance of Fair Value Gains and Losses, and the Impact of Disclosure and Corporate Governance
This study uses variance decomposition analysis to examine the variance contribution of fair value gains and losses (FVGL) relative to net income (NI) in driving security returns for a sample of 180 US commercial banks for the period 2001-2005. I document that FVGL are significant in explaining the volatility of unexpected returns and that the relative importance of FVGL to NI is an increasing function of disclosure and corporate governance. While the effect of disclosure is direct, the effect of corporate governance is indirect and comes via disclosures. Further, I classify disclosures by type of risk and find that the relative variance contribution of FVGL increases with the level of disclosure related to interest rate risk, credit risk and derivatives risk for banks that are exposed to these risks. Overall, the results suggest that FVGL are risk relevant; and that disclosure and corporate governance aid investors in evaluating the risk revelation attributes of fair value estimates.
banks, fair value, variance decomposition
SMU Cox: Accounting (Topic)