[Using a sample of publicly traded savings and loan associations (S&Ls), this paper provides evidence that off-balance-sheet derivatives activities are positively associated with lower stock-price interest rate sensitivity. Similar to the results for derivatives, on-balance-sheet exposures to interest rate changes, as measured by the maturity mismatch of institutions' assets and liabilities, are also value relevant. Currently, the measures of on-balance-sheet interest rate risk and the corresponding impact of derivatives used in this study are not required annual report disclosures. Rather, these data are obtained from regulatory filings. The reporting of the impact of derivatives on the corresponding measure of on-balance-sheet risk is analogous to the concept of "at-risk" disclosures for derivatives which have been encouraged by the FASB and SEC. Therefore, the results suggest that the proposed disclosures will provide value-relevant information about interest rate risk for S&Ls.]

Using a sample of publicly traded savings and loan associations (S&Ls), this paper provides evidence that off-balance-sheet derivatives activities are positively associated with tower stock-price interest rate sensitivity. Similar to the results for derivatives, on-balance-sheet exposures to interest rate changes, as measured by the maturity mismatch of institutions' assets and liabilities, are also value relevant. Currently, the measures of on-balance-sheet interest rate risk and the corresponding impact of derivatives used in this study are not required annual report disclosures. Rather, these data are obtained from regulatory filings. The reporting of the impact of derivatives on the corresponding measure of on-balance- sheet risk is analogous to the concept of "at-risk" disclosures for derivatives which have been encouraged by the FASB and SEC. Therefore, the results suggest that the proposed disclosures will provide value-relevant information about interest rate risk for S&Ls.

We use an option pricing framework to model equity valuation when firms face costs associated with violating accounting-based debt covenants. Our model shows that the value of equity depends on two factors: the economic value of the firm and the probability that the firm violates the covenant. Consistent with the model's prediction that the `covenant' effect is greatest for firms near covenant violation, we find that responses to earnings that are less informative about future cash flows (losses and transitory earnings) are significant only for thrift institutions that are near violation of regulatory net worth covenants.

A detailed analysis of 49 firms subject to AAERs suggests that approximately one-quarter of the misstatements meet the legal standards of intent. In the remaining three quarters, the initial misstatement reflects an optimistic bias that is not necessarily intentional. Because of the bias, however, in subsequent periods these firms are more likely to be in a position in which they are compelled to intentionally misstate earnings. Overconfident executives are more likely to exhibit an optimistic bias and thus are more likely to start down a slippery slope of growing intentional misstatements. Evidence from a high-tech sample and a larger and more general sample support the overconfidence explanation for this path to misstatements and AAERs.

Statement of Financial Accounting Standards No. 109 (SFAS No. 109) allows firms to use their discretion to set arbitrarily high valuation allowances against deferred tax assets. Firms can then later use these "hidden reserves" to manage earnings. Our evidence indicates that most banks do not record a valuation allowance to manage earnings, but rather to follow the guidelines of SFAS No. 109. However, if the bank is sufficiently well capitalized to absorb the current‐period impact on capital, then the amount of the valuation allowance increases with a bank's capital. In later years, bank managers adjust the valuation allowance to smooth earnings. The magnitude of the discretionary adjustment increases with the deviation of unadjusted earnings from the forecast or historical earnings.

This paper provides evidence that managers strategically select the prior-period earnings amount that is used as a benchmark to evaluate current-period earnings in quarterly earnings announcements. Managers are more likely to separately announce a prior-period gain from the sale of property, plant, and equipment (PPE) than a loss. This strategy provides the lowest possible benchmark for evaluating current earnings, thereby allowing the manager to highlight the most favorable change in earnings. This strategic disclosure behavior is more likely to occur when it prevents a negative earnings surprise. The observed strategic disclosure decisions are consistent with a conjecture by managers that the nonrecurring nature of the prior-period gain/loss will be forgotten unless it is separately announced. Consistent with this conjecture, there is some evidence that equity investors, one potential target of strategic reporting, use the benchmark that managers provide in earnings announcements to evaluate current earnings, even when the components of this benchmark have different persistence. However, cross-sectional analyses provide no evidence that managers ex post exploit the equity mispricing that occurs between the earnings announcement date and the release of the financial statements.

Using responses to a well‐known confidential survey, we study corporations' use of derivatives to “take a view” on interest rate and currency movements. Characteristics of speculators suggest that perceived information and cost advantages lead them to take positions actively; that is, they do not speculate to increase risk by “betting the ranch.” Speculating firms encourage managers to speculate through incentive‐aligning compensation arrangements and bonding contracts, and they use derivatives‐specific internal controls to manage potential abuse. Finally, we examine whether investors reading public corporate disclosures are able to identify firms that indicate speculating in the confidential survey; they are not.