Risk-Relevance of Fair Value Income Measures for Commercial Banks

55 Pages Posted: 1 Oct 2005

See all articles by Leslie D. Hodder

Leslie D. Hodder

Indiana University - Kelley School of Business - Department of Accounting

Patrick E. Hopkins

Indiana University - Kelley School of Business - Department of Accounting

James Michael Wahlen

Indiana University - Kelley School of Business - Department of Accounting

Abstract

We investigate the risk relevance of the standard deviation of three performance measures: net income, comprehensive income, and a constructed measure of full-fair-value income for a sample of 202 U.S. commercial banks from 1996 to 2004. We find that, for the average sample bank, the volatility of full-fair-value income is more than three times that of comprehensive income and more than five times that of net income. We find that the incremental volatility in full-fair-value income (beyond the volatility of net income and comprehensive income) is positively related to market-model beta, the standard deviation in stock returns, and long-term interest rate beta. Further, we predict and find that the incremental volatility in full-fair-value income (1) negatively moderates the relation between abnormal earnings and banks' share prices and (2) positively affects the expected return implicit in bank share prices. Our findings suggest full-fair-value income volatility reflects elements of risk that are not captured by volatility in net income or comprehensive income, and relates more closely to capital-market pricing of that risk than either net-income volatility or comprehensive-income volatility.

JEL Classification: M41, M44, G12

Suggested Citation

Davis Hodder, Leslie D. and Hopkins, Patrick E. and Wahlen, James Michael, Risk-Relevance of Fair Value Income Measures for Commercial Banks. Accounting Review, April 2006, Available at SSRN: https://ssrn.com/abstract=810925

Leslie D. Davis Hodder

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Patrick E. Hopkins

Indiana University - Kelley School of Business - Department of Accounting ( email )

Kelley School of Business
1309 E. 10th Street
Bloomington, IN 47405
United States
812-855 2617 (Phone)
812-855 8679 (Fax)

James Michael Wahlen (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2658 (Phone)
812-855-8679 (Fax)

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