The fair value option for liabilities and stock returns during the financial crisis

• We study stock returns of financial institutions following the adoption of fair value option for liabilities (FVOL) during the financial crisis.
• We find negative abnormal returns on the magnitude of 12 to 13% in the first year following FVOL adoption.
• Financially vulnerable firms are more likely to adopt the FVOL and adopters are more likely to receive TARP bailout funds.
• FVOL adoption reveals information not priced by markets at the time of adoption.
• Regulators and investors can utilize private information revealed through the adoption of financial reporting options.

We analyze the stock returns following the adoption of fair value option for liabilities (FVOL) embedded in the SFAS 159 by financial institutions during the financial crisis. We find that FVOL adopters exhibit ex post negative abnormal returns. Moreover, we find that financially vulnerable firms are more likely to adopt the FVOL and that adopters are more likely to receive TARP bailout funds. These results suggest that FVOL adoption reveals information not priced by markets at the time of adoption, and that regulators and investors ought to better utilize private information revealed through financial reporting options.