Value-relevance of banks' derivatives disclosures

This paper investigates the value-relevance of banks' derivatives disclosures provided under SFAS 119. The findings suggest that the fair value estimates for derivatives help explain cross-sectional variation in bank share prices and that the fair values have incremental explanatory power over and above notional amounts of derivatives. I also conduct cross-sectional tests to provide preliminary evidence on the usefulness of derivatives disclosures in examining banks' risk-management strategies. While I find that banks, on average, are reducing their risk exposures using derivatives, further analysis reveals that only 47% of the sample banks appear to use derivatives to reduce risk.

Duke Scholars

Author Mohan Venkatachalam Fuqua School of Business