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The security market reaction of financial institutions to SFAS 95: The statement of cash flows
Abstract
This study examines the security market reaction of financial institutions to the issuance of the FASB's 1986 Exposure Draft (ED) which proposed the Statement of Cash Flows. Through the coordinated efforts of Robert Morris Associates, an association of credit lending officers, financial institutions advocated a need for and lobbied the FASB for the Statement of Cash Flows. Drawing upon the Efficient Market Hypothesis and the Information Content Hypothesis, it was hypothesized that there was a positive security market reaction by financial institutions to the issuance of the ED. Drawing upon theories of coalition and regulation, financial institutions were hypothesized to have lobbied for the change in accounting regulation in order to reduce credit risk associated with lending. Credit risk effects were hypothesized to be positively associated with the security market reaction of financial institutions to the issuance of the ED. Proxy variables for credit risk effects were measured by selected firm characteristics. Normal domestic credit risk was measured by a ratio of the loan loss allowance to total assets. Geographic credit risk related to lending in the Dallas or Kansas City Federal Reserve Bank Districts was represented by a one/zero dummy variable. Foreign credit risk associated with lending internationally to lesser developed countries was represented by a one/zero dummy variable. Using time series analysis, there was a positive, but insignificant security market reaction by financial institutions to the issuance of the ED. Using cross sectional analysis, there was support for concluding that normal domestic credit risk and geographic credit risk were positively associated with the security market reaction to the ED. The hypothesis representing foreign credit risk was not supported by the analysis. The statement of cash flows, useful in evaluating credit risk, is more valuable to financial institutions other than the largest banks involved in lending to lesser developed countries. The results support the theories of coalition ad regulation. Financial institutions organized a coalition and lobbied the FASB to obtain a change in accounting regulation that benefited the financial services industry.
Subject Area
Accounting
Recommended Citation
Okleshen, Marilyn Jean, "The security market reaction of financial institutions to SFAS 95: The statement of cash flows" (1991). ETD collection for University of Nebraska-Lincoln. AAI9121931.
https://digitalcommons.unl.edu/dissertations/AAI9121931