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Fair Value Disclosures for Investment Securities and Bank Equity: Evidence from SFAS No. 115

This paper examines whether the intent-based fair value disclosures by security type under SFAS No. 115 explain the value of bank equity. Focusing on available-for-sale (AFS) and held-to-maturity (HTM) securities, we find both AFS and HTM value differences (fair less book values) explain the value of bank equity. The AFS value differences also explain raw stock returns and abnormal returns, while the HTM value differences explain only the raw returns. The AFS value differences have greater explanatory power than those of the HTM. The explanatory power of the securities' value differences increases when they are considered as separate (AFS and HTM) variables rather than in aggregation. Also, the AFS value differences explain one-year-ahead bank earnings, while the HTM value differences do not. These results remain robust across the different model specifications examined. Overall, they are consistent with our hypotheses and with the view of SFAS No. 115 on the relevance and usefulness of the fair value disclosures to investors.