臺大管理論叢 NTU Management Review VOL.30 NO.2

Asymmetric Valuation Adjustments in Accumulated Other Comprehensive Income 136 1. Introduction Although accounting standard setters have embraced fair value as an attribute of accounting measurement since the 1990s, precisely how firms estimate fair values to adjust the book value of net assets remains unclear and controversial. Many fair value estimates, bypassing the net income, are subjective and recognized in Other Comprehensive Income (OCI) components, which add up to increase the level of the equity book value. Thus, it is fair to assume that managers might use some discretion over the estimates of OCI adjustments to secure their private benefits. More precisely, as book value of equity is important in debt contracting, firm equity valuation and managerial bonus determination (see, e.g., Graham and Lin, 2018; Ohlson, 1995; Biddle and Choi, 2006), OCI adjustments might be subject to discretionary adjustments by management. There is limited and inconclusive evidence in extant literature on whether firms adjust their OCI amounts to manage the book value of equity. Laux and Leuz (2009) highlight that the reliability of fair value adjustments is controversial. Demerjian (2011) finds that the increasing implementation of fair value accounting has reduced the use of balance sheets in private debt contracting. Furthermore, Dhaliwal, Subramanyam, and Trezevant (1999) find no evidence that changes in the book value of equity outperforms net income in terms of stock returns and prediction of future cash flows/income. The above findings may lead one to wonder whether fair value adjustments are less likely to be subject to discretionary adjustments by management. However, previous research also suggests that firms have incentives to increase the balance of their net assets. For example, prior studies report a continuous shift in investors’ emphasis from earnings to the book value of equity. 1 In this paper, we examine whether firms asymmetrically adjust their OCI amounts to manage the book value of equity. Firms typically possess incentives to manage the balance of their net assets. The debt-to-equity ratio (i.e., leverage) often reflects the existence and tightness of accounting-based covenants and debt covenant restrictions, which influence accounting choices in the year preceding and the year of violation (Watts and Zimmerman, 1986; DeFond and Jiambalvo, 1994). And a firm’s market value appears to increase with its book value (see, e.g., Ohlson, 1995; Graham and Lin, 2018). Healy (1985) also shows that the book value of equity is an input used by firms in the bonus contract. Following the 1 See Rayburn (1986), Barth, Beaver, and Landsman (1998), Collins, Maydew, and Weiss (1997), Hayn (1995).