Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

New Insights on the Factors That Intensified the 2008 Financial Crisis

01.07.2014

Columbia Business School study says analysts’ concerns about fair value accounting clouded the already murky waters, fueling the crisis

Widespread finger–pointing in the fallout from the 2008–2009 financial crisis is only exacerbated by the continuing legal battles between the big banks and SEC. Fair value accounting (FVA) is often cast as the culprit for accelerating the economic downturn, but a new study from Columbia Business School, published in the Journal of Accounting and Public Policy, examines FVA’s role in the financial crisis and considers the advantages it offers relative to other methods of accounting.  

“Fair value accounting has been blamed for the near collapse of the US banking system,” said Urooj Khan, assistant professor of accounting at Columbia Business School and co–author of the research. “On one hand, FVA can provide timely and relevant information during crisis, but it can feel like ripping off a Band–Aid causing immediate pain as it accelerates the process of price adjustment and resource reallocation in times of financial turmoil. On the other hand, it can increase contagion among banks by potentially fueling fire sales. Our research demonstrates that investors’ concerns about FVA’s detrimental affect overshadowed the beneficial role it plays in promoting timely market information.”

The study, titled “Market reactions to policy deliberations on fair value accounting and impairment rules during the financial crisis of 2008-2009 , ” was co–authored by Professor Urooj Khan of Columbia Business School and Professor Robert M. Bowen of the University of San Diego’s School of Business Administration and the University of Washington’s Foster School of Business. The researchers explore stock market investors and creditors reactions to events (such as policy deliberations, recommendations, and decisions) related to the relaxation of FVA rules during a period of extreme financial turmoil—September 2008 to April 2009.

The research found that while news about relaxing FVA rules generally led to positive stock market reactions, results varied depending on a variety of bank characteristics. The research also revealed additional takeaways that call into question FVA’s role in the recent financial crisis:

  • Investors acted as if FVA rules harmed banks and accelerated their decline, resulting in a favorable reaction to discussions about relaxing FVA rules.
  • There is some evidence that banks that were more susceptible to contagion are the ones that benefited the most from the change in FVA rules.
  • For banks without analyst coverage, investor reactions to relaxed FVA rules were less positive, suggesting that, in the absence of other information sources, investors perceive FVA data as providing timely and informative disclosures about banks’ financial soundness.
  • Banks with a higher proportion of illiquid assets saw a more positive stock price reaction to potential relaxation of FVA rules.

The Research

Khan and Bowen examined investor and creditor reactions to 10 events—including policymaker deliberations, recommendations, and decisions—related to the relaxation of FVA and impairment rules in the banking industry.

To complement the event analysis, the study also investigated cross–sectional stock price reactions to bank–specific factors that potentially contributed to the financial crisis’ spread. Factors analyzed included whether banks were well capitalized, their proportion of fair value assets, and the availability of information sources other than FVA data.

The research sample includes the 288 US bank holding companies that file the FR Y–9C report and have financial data available on the Bank Holding Companies Database maintained by the Federal Reserve Bank of Chicago, in addition to having stock price data on the Center for Research in Security Prices (CRSP) for the 6–month period of analysis from September 2008 to April 2009—a period in which regulators faced intense political pressure to relax FVA.

To learn more about the cutting–edge research being conducted at Columbia Business School, please visit www.gsb.columbia.edu.

###

About Columbia Business School

Columbia Business School is the only world–class, Ivy League business school that delivers a learning experience where academic excellence meets with real–time exposure to the pulse of global business. Led by Dean Glenn Hubbard, the School’s transformative curriculum bridges academic theory with unparalleled exposure to real–world business practice, equipping students with an entrepreneurial mindset that allows them to recognize, capture, and create opportunity in any business environment. The thought leadership of the School’s faculty and staff, combined with the accomplishments of its distinguished alumni and position in the center of global business, means that the School’s efforts have an immediate, measurable impact on the forces shaping business every day. To learn more about Columbia Business School’s position at the very center of business, please visit www.gsb.columbia.edu.

Evan Nowell | Eurek Alert!

Further reports about: Banks Crisis Financial academic characteristics potentially recommendations

More articles from Business and Finance:

nachricht RWI/ISL Container Throughput Index: Setback for World Trade
23.06.2015 | Rheinisch-Westfälisches Institut für Wirtschaftsforschung e.V.

nachricht New research shows positive welfare effects of natural resource extraction in Africa
02.06.2015 | University of Gothenburg

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Viaducts with wind turbines, the new renewable energy source

Wind turbines could be installed under some of the biggest bridges on the road network to produce electricity. So it is confirmed by calculations carried out by a European researchers team, that have taken a viaduct in the Canary Islands as a reference. This concept could be applied in heavily built-up territories or natural areas with new constructions limitations.

The Juncal Viaduct, in Gran Canaria, has served as a reference for Spanish and British researchers to verify that the wind blowing between the pillars on this...

Im Focus: X-rays and electrons join forces to map catalytic reactions in real-time

New technique combines electron microscopy and synchrotron X-rays to track chemical reactions under real operating conditions

A new technique pioneered at the U.S. Department of Energy's Brookhaven National Laboratory reveals atomic-scale changes during catalytic reactions in real...

Im Focus: Iron: A biological element?

Think of an object made of iron: An I-beam, a car frame, a nail. Now imagine that half of the iron in that object owes its existence to bacteria living two and a half billion years ago.

Think of an object made of iron: An I-beam, a car frame, a nail. Now imagine that half of the iron in that object owes its existence to bacteria living two and...

Im Focus: Thousands of Droplets for Diagnostics

Researchers develop new method enabling DNA molecules to be counted in just 30 minutes

A team of scientists including PhD student Friedrich Schuler from the Laboratory of MEMS Applications at the Department of Microsystems Engineering (IMTEK) of...

Im Focus: Bionic eye clinical trial results show long-term safety, efficacy vision-restoring implant

Patients using Argus II experienced significant improvement in visual function and quality of life

The three-year clinical trial results of the retinal implant popularly known as the "bionic eye," have proven the long-term efficacy, safety and reliability of...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

World Conference on Regenerative Medicine in Leipzig: Last chance to submit abstracts until 2 July

25.06.2015 | Event News

World Conference on Regenerative Medicine: Abstract Submission has been extended to 24 June

16.06.2015 | Event News

MUSE hosting Europe’s largest science communication conference

11.06.2015 | Event News

 
Latest News

Siemens receives order for offshore wind power plant in Great Britain

03.07.2015 | Press release

'Déjà vu all over again:' Research shows 'mulch fungus' causes turfgrass disease

03.07.2015 | Agricultural and Forestry Science

Discovery points to a new path toward a universal flu vaccine

03.07.2015 | Health and Medicine

VideoLinks
B2B-VideoLinks
More VideoLinks >>>