Market reaction to valuation adjustments for financial instruments: Evidence from Greece

This paper investigates the accounting policy choice regarding unrealized gains or losses from securities and its pricing effects by examining the market reaction to the mark to market accounting treatment of equity investments of Greek firms during the period 2002–2004. Using data for firms listed in the Athens Stock Exchange, we find that, on average, firms chose to take valuation gains to the income statement and losses through equity. Subsequently, a treatment effects model of returns on control variables, the valuation adjustment and a dummy for the accounting treatment, which is modeled as conditional to profitability, size, and risk was estimated. Results show that the valuation adjustment contains information for market prices while the market considers the decision to charge the valuation adjustment to equity to be a negative signal.