An Empirical Analysis of the Economic Implications of Fair Value Accounting for Investment Securities

This paper analyzes security returns of bank holding companies and insurance companies during periods surrounding the adoption of SFAS 115. We find that bank share prices were negatively affected by the examined events but find little share price reaction for insurance companies. Our evidence suggests that banks were adversely affected by the standard because of problems with the standard\u27s market value accounting approach. Cross-sectional analysis of event period returns shows that banks that more frequently traded their investments and banks with longer maturing investments were the most negatively impacted by the standard. Further support of these cross-sectional results is provided by an analysis of actual investment behavior in the 1993-1994 period