“Some fuzzy math”: relational information on debt value adjustments by managers and the financial press

Abstract

This study provides comprehensive descriptive evidence on the occurrence, size, and reporting by managers and the financial press of debt value adjustments due to a change in own credit risk (DVAs). The study is motivated by a public debate about DVAs in which critics describe them as ''counterintuitive'' and claim that managers disclose DVA information strategically to make firms ''look good''. Analyzing a sample of 405 firm-quarters of 19 US financial firms that report DVAs between 2007 and 2014, I found that positive and negative DVAs appear similarly often and with similar magnitude. I further found that managers provide more information on large negative DVAs compared to positive DVAs. Managers also provide more DVA information when they have strategic incentives to do so. Examining newspaper articles on 202 firm-quarters, I found that the financial press is more likely to cover large positive DVAs and DVAs about which managers provided more information. Analyzing the articles' content, I found that the press is more likely to provide new DVA information if managers' press releases contain little information. The findings are in line with popular claims of asymmetric DVA reporting by managers. They are further consistent with the financial press acting as a counterweight to such asymmetric reporting.

Fair Value of Earnouts: Valuation Uncertainty or Cookie Jar Reserve?

“…When a bank's own credit risk changes, any unrealized gains and losses from debt revaluation are recognized in the bank's income statement. This causes counterintuitive financial reporting results, as banks increase earnings when their own credit quality deteriorates (Lipe 2002;Rice 2012;Kaumanns 2019). Prior studies provide both experimental and archival evidence validating the controversial debate over fair value accounting for financial liabilities.…”