THE EFFECTS OF SFAS NO. 133 ON FINANCIAL STATEMENTS IN BANK HOLDING COMPANIES: EARNINGS VOLATILITY AND EQUITY VOLATILITY

Abstract

This paper investigates the effects of SFAS 133 on earnings volatility, earnings predictability, and equity volatility in bank holding companies (BHCs). In contrast to large BHCs' assertion prior to the adoption of SFAS 133, the three income-affecting portions (i.e. hedge ineffectiveness gains/losses, gains/losses excluded in the assessment of effectiveness, and effects from canceled forecasted transactions once designated as cash flow hedge) did not increase earnings volatility in the top 30 BHCs for the first 12 quarters after adoption. Also, the three income-affecting portions did not deteriorate analysts' forecast performance. In addition, there is no evidence that volatility of stockholders' equity significantly increases due to SFAS 133. Further investigation of notes to financial statements reveals that some BHCs adjusted their usage of derivatives prior to SFAS 133 to mitigate the impact of SFAS 133 on earnings volatility.