The Amendment of IAS 39

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Abstract
This study examines the determinants of banks’ decision to reclassify financial assets under the amendment of International Accounting Standard (IAS) 39 and the capital market consequences of these reclassifications. Based on the prior literature, the authors identify two possible drivers of banks’ reclassification behavior, namely, solvency concerns and exposure to financial markets. The authors expect these reclassifications to adversely affect the market pricing of banks’ accounting numbers. The results of this study show that capital adequacy ratios close to the minimum requirement are indeed associated with banks’ decisions to reclassify financial assets. Furthermore, the authors find evidence that the level of exposure to fair value measurement also increases the probability to reclassify. In the second part of the analyses, they use a difference-in-differences approach to test the market’s pricing of bank’s accounting numbers around the time of reclassification. They observe that for reclassifying banks, investors rely less on earnings and book value of equity after the reclassifications than before. However, before the amendment of IAS 39, the authors find no difference in investors’ pricing of the accounting numbers of a control group of non-reclassifying banks and those of the reclassifying banks.

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