Hedging Performance and Fair-Value Financial Reporting: Evidence from Bank Holding Companies

Abstract

This study investigates whether the inclusion of the fair-value-based hedging performance measure improves the value and risk relevance of accounting earnings using data from the regulatory filings of bank holding companies required by the Federal Reserve Bank. Statement of Financial Accounting Standards No. 133 (SFAS 133) requires most types of hedge ineffectiveness to be measured on a fair value basis and reported in earnings. This earnings recognition requirement was the focal point of controversy surrounding the adoption of SFAS 133. This study provides new evidence that the fair-value-based earnings component required under SFAS has predictive power over future performance. I further show that incorporating this fair-value-based hedging performance measure helps improve the value and risk relevance of accounting earnings. The findings of this study help inform the broader debate over the effect of fair-value-based financial reporting on capital markets.