Fair Value Accounting for Liabilities and Own Credit Risk
Changes in credit risk may arise when either the value or the risk of corporate assets changes. Changes in the equity value associated with the changes in the asset value and changes in asset risk can be characterized into potentially countervailing direct and indirect effects. The indirect effect of risk on equity value is a function of factors that affect the debt value of including leverage, asset value, and asset risk. This study examines whether the equity value reflects the profits and losses associated with the changes in the debt value consistent with the predictions of Merton . The insurance companies listed in the Stock Exchange during 2010-2015 were selected to test the desired hypotheses. It has been found that the stock returns are negatively related to the increase in credit risk as reflected in the changes of estimated bond ratings. More importantly for the research question, it has been realized that the relationship between risk changes and equity returns is negative when the leverage is higher.
changes in credit risk may arise when either the value or the risk of corporate assets changes. changes in the equity value associated with the changes in the asset value and changes in asset risk can be characterized into potentially countervailing direct and indirect effects. the indirect effect of risk on equity value is a function of factors that affect the debt value of including leverage,...متن کامل
The federal government supports some private activities—such as home ownership, postsecondary education, and certain commercial ventures—through credit assistance offered to individuals and businesses. Some of that assistance is in the form of direct federal loans, and some is through federal guarantees of loans made by private financial institutions. At the end of fiscal year 2011, about $2.7 ...متن کامل
In this dissertation we present an overview of the proposals of the International Accounting Standards Board for measurement of insurance assets and liabilities at market value. The Board has not yet finalised a standard for insurance contracts, but a Draft Statement of Principles has been published, providing indication of how fair value accounting will be implemented. We focus on life insuran...متن کامل
The paper analyzes proposed accounting for financial instruments, specifically the practice of a debtor reducing the carrying value of debt and recognizing a gain as the debtor's own credit quality deteriorates. A numerical example based on Boston Chicken in 1997 shows how several common ratios provide opposite signals under current versus proposed accounting. A discussion of the example raises...متن کامل
In this paper we present the fundamental approaches of financial economics to valuation. Three methods are demonstrated by which financial economists account for risk. We illustrate how these methods relate to one another and how they can be applied in the valuation of risky corporate bonds, guaranteed investment contracts (GICs) with and without interest rate contingencies, and whole life insu...متن کامل
دوره 2 شماره 1
صفحات 55- 68
تاریخ انتشار 2017-03-01
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