Tainted Portfolios: How Impairment Accounting Rules Restrict Security Sales

28 Pages Posted: 27 May 2020

See all articles by Brett Wooten Cantrell

Brett Wooten Cantrell

University of Mississippi - Patterson School of Accountancy

Christopher G. Yust

Texas A&M University

Multiple version iconThere are 2 versions of this paper

Date Written: May/June 2019

Abstract

Contrary to claims that fair value accounting exacerbated banks’ securities sales during the recent financial crisis, we present evidence that suggests – if anything – that the current impairment accounting rules served as a deterrent to selling. Specifically, because banks must provide evidence of their ‘intent and ability’ to hold securities with unrealized losses, there are strong incentives to reduce, rather than increase, security sales when market values decline to avoid ‘tainting’ their remaining securities portfolio. Validating this concern, we find that banks incur greater other‐than‐temporary impairment (OTTI) charges when they sell more securities. We then find that banks sell fewer securities when their security portfolios have larger unrealized losses (and thus larger potential impairment charges), and these results are concentrated in banks with homogenous securities portfolios, expert auditors, more experienced managers, and greater regulatory capital slack. Overall, our results suggest that – contrary to critics’ claims – the accounting rules appear to have reduced banks’ propensity to sell their securities during the financial crisis.

Keywords: auditor expertise, fair value accounting, financial crisis, impairment, OTTI, pro‐cyclical, security sales, standard setting

Suggested Citation

Cantrell, Brett Wooten and Yust, Christopher G., Tainted Portfolios: How Impairment Accounting Rules Restrict Security Sales (May/June 2019). Journal of Business Finance & Accounting, Vol. 46, Issue 5-6, pp. 608-635, 2019, Available at SSRN: https://ssrn.com/abstract=3604474 or http://dx.doi.org/10.1111/jbfa.12374

Brett Wooten Cantrell (Contact Author)

University of Mississippi - Patterson School of Accountancy ( email )

P.O. Box 1848
Conner Hall
University, MS 38677
United States

Christopher G. Yust

Texas A&M University ( email )

430 Wehner
College Station, TX 77843-4353
United States
979.845.3439 (Phone)

HOME PAGE: http://www.christopheryust.com

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