What can we learn about credit risk from debt valuation adjustments?

Lin, Wen and Panaretou, Argyro and Pawlina, Grzegorz and Shakespeare, Catherine (2023) What can we learn about credit risk from debt valuation adjustments? Review of Accounting Studies, 28 (4). 2556–2588. ISSN 1380-6653

[thumbnail of DVA_Paper_Final_With title page]
Text (DVA_Paper_Final_With title page)
DVA_Paper_Final_With_title_page.pdf - Accepted Version
Available under License Creative Commons Attribution.

Download (784kB)

Abstract

Motivated by the debate about the introduction of the fair value option for (financial) liabilities (FVOL) and the requirement to recognize and separately disclose in financial statements debt valuation adjustments (DVAs), this study explores what we can learn about a firm’s credit risk from DVAs. Using a sample of US bank holding companies that elect the FVOL, we show that DVAs generally cannot be explained by the same factors that explain contemporaneous changes in bank’s credit quality. We further find that DVAs can explain future changes in credit risk when the fair value of liabilities is based on managerial inputs (Level 3). Overall our results suggest that managers have an information advantage in estimating credit risk and that DVAs provide inside information to the market.

Item Type:
Journal Article
Journal or Publication Title:
Review of Accounting Studies
Uncontrolled Keywords:
/dk/atira/pure/subjectarea/asjc/1400
Subjects:
?? credit riskdebt valuation adjustmentsfair value optionfinancial liabilitiesbusiness, management and accounting(all)accounting ??
ID Code:
164250
Deposited By:
Deposited On:
10 Jan 2022 13:35
Refereed?:
Yes
Published?:
Published
Last Modified:
17 Jun 2024 00:03