Accounting and Finance

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This is the collection for the University of Waterloo's School of Accounting and Finance.

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Browsing Accounting and Finance by Author "O'Brien, Patricia"

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    Does the Financial Reporting Transparency of Securitization Affect Bank Lending Decisions?
    (University of Waterloo, 2018-11-06) Mamo, Kaleab; O'Brien, Patricia
    This thesis examines the effect of financial reporting transparency for securitization on banks' mortgage lending decisions. Prior research (e.g., Mian & Sufi 2009, Keys, Mukherjee, Seru, & Vig 2010} shows that securitization reduces banks' incentives to screen and monitor borrowers. I posit that transparency plays a significant role by affecting bank stakeholders' ability to monitor and discipline bank lending decisions. I identify three specific channels for monitoring and discipline, namely corporate governance, regulatory oversight, and market discipline by uninsured depositors. I hypothesize that transparency affects bank risk-taking in mortgage lending, and that monitoring and discipline from external stakeholders moderates this effect. I test my hypotheses using difference-in-differences tests around five FASB pronouncements relating to securitization, issued since 1996, of which one decreases and the others increase transparency. I obtain loan-level data to construct new measures of bank risk-taking in mortgage lending based on the borrower income, loan amount and property location. I validate the proposed measures using bank-level future mortgage delinquencies and charge-offs. The main results generally do not support my hypotheses. I find that, in most cases, the effect of transparency on risk-taking is either insignificant or in the opposite direction of the prediction. These findings are robust to multiple sensitivity tests. However, I find some evidence supporting my hypotheses when comparing bank lending decisions during the least transparent period to those during the most transparent period within my sample. As a whole, my findings support the null hypothesis that transparency does not affect banks' risk-taking in their mortgage lending decisions. This conclusion is counter-intuitive and contrary to the commonly held view that transparency promotes better stakeholder monitoring of bank risk-taking. I identify alternative explanations for the null results, including: (i) whether the accounting pronouncements affect transparency as expected, (ii) the complexity of the setting, and (iii) potential noise in the data sources and the development of my measures. This thesis contributes to the literature in multiple ways. The proposed risk-measures might prove useful to future researchers examining risk-taking in mortgage lending. My findings are also relevant to the branches of literature examining the effect of securitization on bank lending decisions, the effect of transparency on bank risk-taking, and the real effects of accounting standards. This thesis might also be useful to standard setters and regulators in their attempt to improve financial reporting quality and to promote better decision making.
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    Fair Value Accounting and Informational Efficiency: A Look at the Confirmatory Role of Financial Reports
    (University of Waterloo, 2021-11-02) Hong, Min Jeong; O'Brien, Patricia
    Prior analytical research suggests that independently verified financial reports can enhance informational efficiency by serving a confirmatory role, where they discipline managers’ unverified, but more timely, voluntary disclosures. I study the confirmatory role of financial reports by examining how fair value accounting affects two aspects of informational efficiency: the credibility of voluntary disclosures and the timeliness of price discovery. I argue that greater measurement uncertainty associated with fair values can make the accounting numbers less verifiable and potentially less reliable. This, in turn, can hinder the extent to which financial reports can serve a confirmatory role. Thus, I hypothesize that fair value accounting can reduce the credibility of voluntary disclosures and the timeliness of price discovery. To examine these hypotheses, I exploit SFAS 133 (FASB 1998), which increases fair value accounting exposure for derivative users by mandating all derivatives to be reported at fair value. I compare the credibility of voluntary disclosures and the timeliness of price discovery of derivative users to those of derivative non-users, pre- versus post-SFAS 133, using a difference-in-differences research design. I identify derivative users using a combination of an engine-based keyword search and manual tracing to the 10-k filings on the SEC’s EDGAR database. Using management forecasts as a key voluntary disclosure, I find results suggesting that an increase in exposure to fair value accounting impairs the credibility of good news management forecasts, but not of bad news forecasts. A potential explanation for this asymmetric result is that bad news from management is inherently more credible and, thus, less susceptible to credibility concerns. In contrast, I find results suggesting that fair value accounting does not impede timely price discovery, but rather, can enhance timely price discovery in negative return periods. I also identify potential alternative explanations for these results. In examining the impact of fair value accounting on the timeliness of price discovery, I find that the firm-level intraperiod timeliness metric, used in prior literature, has some limitations. Specifically, large return reversals during the period can lead to values that cannot be clearly interpreted as the timeliness of price discovery. I create a proxy to capture the extent of return reversals and find that the portfolio-level intraperiod timeliness metric mitigates such issues through averaging firm-level returns. In particular, using simulation analysis, I explore portfolio sizes that will mitigate these issues and use this to inform my analysis. These results suggest that fair value accounting can have unintended adverse consequences for informational efficiency, by weakening the credibility of managers’ voluntary disclosures. My findings are relevant to standard setters and regulators, given a continual transition towards greater fair value accounting. This thesis highlights the importance of considering the system of public financial reporting and disclosure, where the financial report is only one of many sources of information, when assessing the impact of accounting.