Does Fair Value Accounting Affect How Banks Convey Information About Future Performance? Evidence from SFAS 115

Studies find that banks realize gains and losses on investment securities to signal changes in future operating performance. We do not find evidence of this behavior using a sample beginning after the enactment of Statement of Financial Accounting Standard 115 (SFAS 115). We hypothesize that SFAS 115’s fair value disclosure requirement caused managers to stop signaling with realized gains and losses (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 analyst forecast quality decreased and information asymmetry increased for affected banks. 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 previously used asset sales to signal