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Does it matter who serves on the Financial Accounting Standards Board? Bob Herz’s resignation and fair value accounting for loans

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Abstract

On August 24, 2010, Bob Herz, then chairman of the Financial Accounting Standards Board (FASB) resigned unexpectedly. Before his resignation, Herz supported a FASB proposal for applying fair value to loans and cast the deciding vote. This proposal received strong pushbacks from banks and bank regulators. Using an event study methodology, we examine whether Herz’s abrupt resignation changed the market’s expectation on whether the fair value proposal would be finalized. We find that bank investors responded positively to Herz’s resignation, especially banks that would have been affected more by the fair value requirement for loans. They also responded negatively to the initial proposal and positively to the later reversal of the proposal after Herz’s departure. Our results indicate that bank investors believed that Herz’s position on the fair value proposal is crucial to the final outcome of the proposal.

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Notes

  1. The preparer community has demanded “at least two or preferably three members” from corporate America (Miller and Redding 1986, p. 36). The Association for Investment Management and Research (AIMR) has lamented the underrepresentation of users’ perspective on the board: “It is baffling to us that the Financial Accounting Foundation allowed the FASB to carry on year after year missing the background and experience of at least one financial statement user” (Knutson 1993, p. 78). The board’s oversight body, the Financial Accounting Foundation (FAF) does respond to different interest groups’ demands when choosing board members. For example, the FAF quickly removed the initial requirement that four of the seven board members should come from public accounting firms after a U.S. Senate subcommittee criticized the big accounting firms’ control over standard setting.

  2. Herz went through a harsh hearing at the Congress in March 2009. The intense political pressure triggered speculation that Herz might leave the board at the time. Some commentators also called for Herz’s resignation (Ketz 2009). However, Herz did not resign until a year and a half later, so it is unlikely that investors can anticipate the exact timing of Herz’s resignation. Private conversations with people who worked closely with Herz confirm that Herz’s decision also surprised them, suggesting that it is unlikely that the market knew about Herz’s decision prior to the official announcement.

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Acknowledgments

We thank David Erkens, Richard Frankel, Bob Herz, Tom Linsmeier, Xiumin Martin, Stephen Penman, Karthik Ramanna, K. R. Subramanyam, Shyam V. Sunder, Marshall Vance, Jieying Zhang, anonymous reviewers, and workshop participants at Michigan State University, Washington University in St. Louis, University of Southern California, and the 2014 FARS mid-year meeting in Houston for helpful comments. All errors are our own. Professors Jiang and Wang are grateful for financial support from the Department of Accounting and Information Systems at Michigan State University. Professor Xie is grateful for financial support from Gabelli School of Business of Fordham University.

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Authors and Affiliations

  1. Eli Broad College of Business, Michigan State University, East Lansing, MI, 48824, USA

    John Jiang & Isabel Yanyan Wang

  2. Gabelli School of Business, Fordham University, New York City, NY, 10023, USA

    Yuan Xie

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  1. John Jiang
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  2. Isabel Yanyan Wang
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  3. Yuan Xie
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Correspondence to John Jiang.

Appendices

Appendix 1

See Table 6.

Table 6 Variable definitions
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Appendix 2

See Table 7.

Table 7 Biographic information: Bob Herz and Leslie Seidman
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Appendix 3

See Table 8.

Table 8 Details on accounting policies that Seidman dissented from Herz during their overlap
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Appendix 4: Sample headline news from The Wall Street Journal on the three events dates

  1. 1.

    August 24, 2010, when Herz resigned unexpectedly:

    • Housing Slump Spooks Investors

    • Fed Split On Move To Bolster Sluggish Economy

    • U.S. Housing: Fears of Red Ink Prompt Loan Insurer to Raise Charges

    • H–P Trumps Dell With Offer for 3PAR

    • Some Chrysler Dealers See Un Problema in Fiat’s Plans

    • Some Chrysler Dealers See Un Problema in Fiat’s Plans

  1. 2.

    May 26, 2010, when the FASB announced its fair value proposal for loans:

    • Bernanke Continues Fight Against More Fed Scrutiny

    • Still Broken: Banks Trim Debt, Obscuring Risks

    • Apple’s Dealings In Music Examined

    • Microsoft Realigns Gadget Unit

    • BP Cites Crucial ‘Mistake’—‘Very Large Abnormality’ in the Well Wasn’t Heeded Hours Before Fatal Explosion

  1. 3.

    January 25, 2011, when the FASB decided not to require fair values for loans:

    • A ‘Short’ Plays Washington

    • No State Bailouts, Lawmaker Says

    • Penney to Give Activists a Say

    • Justices Extend Protection Over Workplace Retaliation

    • Honda Probe Finds Improper Dealings

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Jiang, J., Wang, I.Y. & Xie, Y. Does it matter who serves on the Financial Accounting Standards Board? Bob Herz’s resignation and fair value accounting for loans. Rev Account Stud 20, 371–394 (2015). https://doi.org/10.1007/s11142-014-9301-z

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  • DOI: https://doi.org/10.1007/s11142-014-9301-z

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