| Summary: | 博士 === 國立臺北大學 === 會計學系 === 107 === This study examines what equity incentives drive the bank to adopt the fair value option (FVO). SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities, allows firms to value financial instruments at fair values. Therefore, top manager can discretionarily adopt the fair value option (FVO) for a specific intention. In general, the firm grants the top manager equity incentives to align manager’s action with stockholder’s interest. Portfolio vega and portfolio delta respectively measure the sensitivity of the manager’s wealth to stock return volatility and stock price (Coles, Daniel, and Naveen, 2006; Hayes, Lemmon, and Qiu, 2012). Therefore, portfolio vega provides managers with an incentive to increase firm risk whereas portfolio delta will have two countervailing effects on financial reporting decision (Armstrong, Larcker, Ormazabal, and Taylor, 2013). Although the fair value accounting (FVA) provide relevant and transparent accounting information, fair value earnings are substantially more volatile earnings, thus leading to a higher volatility of stock returns and more bank’s risk. This study documents that portfolio vega drives the managers to more likely adopt FVO because of mitigating the risk-related problem. However, portfolio delta possesses reward effect and risk effect. In respect of reward effect, managers do not necessarily benefit from the stock price because of relevant and transparent information. In contrast, inherent and intentional estimation errors and more volatile earnings increase risk effect. This study shows that portfolio delta drives the managers to less adopt FVO because of increasing risk effect under FVO. Specifically, empirical results of this study find that when the top management team or the CEO faces risk-taking incentive and pay-performance sensitivity in compensation simultaneously, the incentive to increase stock price will not dominate the incentive to take risk. Finally, in additional tests, this study replaces the top management team’s vega and delta with the CEO’s one, employs logistic regression for rare events, and uses a different measure of equity incentive for confirming the main result of this study. In addition, the additional tests show that the managerial characteristics and portfolio vega have stronger or weaker effect on FVO.
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