Fair Value Disclosure ; Evidence from Investment Securities and the Market Valuation of Japanese Banks

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This study examines the relationships between banks'earnings information and their stock prices during 1990 to 1995 from the points of fair value disclosure and earnings management.Japanese banks have started the fair value disclosure of investment securities from 1990. Then, investors have been able to adjust their expectation of banks'earnings and value by the disclosure information. This study tests whether the adjusted earnings have the information content in the Japan Capital Market. Japanese banks had a guideline to keep maximum dividend pay-out ratio by forty percent until 1992, and recently faced to write off huge losses of bad debts caused from the big decrease of land price. During 1990 to 1995 their earnings figures are assumed to be managed. This study tests whether the adjusted earnings have the information content in the Japan Capital Market, and analyzes whether the managed earnings were seen through by investors in the market.This research evaluates Jones (1991), Barth (1994), Beaver=Engel (1996), Sloan (1996) and others, then extends their models and tests new models by panel data analysis method.We find that fair value information of investment securities has strong positive information content and that earnings management is partially seen through by investors.