The effects of SFAS 157 disclosures on investment decisions

This paper examines whether public bank managers change both the composition and classification of their investment portfolios after SFAS 157. We first show that non-agency mortgage-backed securities (MBSNA) are the asset class most likely to be measured using level 3 inputs, which are based on unobservable information. We then find that relative to a control sample of private banks, public banks altered their investment portfolios in a manner that reduced the percentage of MBSNA holdings for which SFAS 157 disclosures are required. Taken together, this evidence is consistent with public banks attempting to avoid disclosure of level 3 assets through changes in both asset composition and classification.