The Effects Of Application Of Listed Commercial Banks’ Fair Value Option On The Volatility Of Earnings

The global financial crisis triggered by the US subprime crisis in 2008 had a major impact on the international financial markets. The fair value of the pro-cyclicality is considered as the culprit of the crisis. In this situation, IASB and FASB accelerated the revision of accounting standards and the financial instruments accounting standards. On the background of international convergence of accounting standards, Ministry of Finance released CAS22 in 2006, the definition and application standards of fair value option converged on IAS39. In 2011 Ministry of Finance released CAS37, which converged on IFRS7. Whether the use of the fair value option can achieve the original intention of the accounting standard Board that reducing the volatility of earnings and not being used to manipulate earnings, determines whether the accounting standard setters continue to converge on IFRS9 released in 2014, and whether to expand the use of fair value option.Based on the information of China listed commercial bank from 2008 to 2014, this paper finds that the use of the fair value option makes a significant increase in earnings volatility, which contrary to the original intention of the development of this accounting standard. Applying fair value option to financial assets only or financial assets and liabilities at the same time makes no significant difference in increased volatility of earnings. Further studies of earnings volatility effect of the fair value option in different quality environments of information disclosure finds, earnings volatilities increase significantly in higher quality of information disclosure of listed commercial banks, but the increase of earnings volatility in low quality of information disclosure of listed commercial banks is not significant. Listed commercial banks with low quality of information disclosure, and applying fair value option to financial assets and liabilities at the same time show the lowest earnings volatility.The use of fair value option expands earnings volatility in China, which contrary to the original intention of the accounting standard setters. Therefore, when we develop and revise the related accounting standards of the fair value option, we should take our financial instruments market situation into consideration, prudentially convergent to IFRS9, and must regulate the information disclosure of the use of the fair value option.