An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Flora F. Niu
Wilfrid Laurier University

Abstract: This paper examines the market valuation of gains reported by using the gain on sale accounting method for securitization under SFAS140. Using a sample of U.S. banks, I find that the gains reported under SFAS140 are value relevant. However, the valuation multiple on the gains is lower than that on earnings from other sources. Further analysis reveals that the lower valuation on the gains is found for banks reporting a positive gain but with lower earnings from other sources. In contrast, the valuation discount is not applied to banks that report the gain but have lower regulatory capital excluding such gains. Moreover, banks appear to strategically report the gains in coordination with other discretionary choices, such as loan loss provision and securities gains or losses for financial reporting purposes. Overall, the results suggest that the capital market discounts the gains reported by the banks that are perceived to report a gain on sale in order to smooth or manage earni

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