Does fair value accounting affect how banks convey information about future performance? Evidence from SFAS 115

Studies find that banks manage earnings with realized gains and losses on investment securities (RGL) to signal changes in future operating performance. We do not find evidence of this relation using a current sample after the enactment of Statement of Financial Accounting Standard 115 (SFAS 115). We hypothesize that SFAS 115’s fair value requirement caused managers to stop signaling with RGL by increasing the transparency of RGL earnings management. Our tests indicate a significant reduction in the association between RGL and future earnings changes after SFAS 115, suggesting that the standard reduced RGL signaling. Consistent with a loss of valuable information, we find that the reduction in RGL signaling after SFAS 115 is associated with lower quality analyst forecasts, and that banks that previously relied on RGL signaling experienced an increase in information asymmetry after SFAS 115. Collectively, these findings suggest that SFAS 115 reduced earnings management with RGL, as the FASB intended, but may have reduced the informativeness of financial reporting at banks that had used asset sales to signal