IMPACT OF FAIR –VALUE ACCOUNTING RULES CHANGES ON FINANCIAL INSTITUTIONS RETURNS

Christopher L. Brown
Samanta Thapa
Western Kentucky University
ABSTRACT
On April 9, 2009, the Financial Accounting Standards Board (FASB) revised fair value
accounting rules by issuing statements FSP FAS 157-4, FSP No. FAS 115-2 and FAS 124-2.
These pronouncements address the issue of fair value measurement and reporting for assets that
trade in markets that have become inactive and disorderly.
During the financial crisis of 2008-2009, under the old fair value accounting and impairment
rules (FASB 157), the banking industry suffered severely as they had to write down the asset
prices significantly lower and charge the losses against earnings thereby jeopardizing the capital
adequacy requirement. The new pronouncements give banks more leeway in determining the fair
-value of assets and liabilities when markets are inactive and also allow banks to keep out certain
losses out of earnings. This will be beneficial for banking industry.
This paper investigates the impact of these changes on the stock prices of financial institutions.
We find significant positive stock price reaction on the event date.