Usefulness of Interest Income Sensitivity Disclosures

Mei Cheng, Leslie D. Hodder, Jessica Watkins

Research output: Contribution to journalArticlepeer-review

Abstract

We document multiple dimensions of usefulness of banks’ interest income sensitivity disclosures. First, we find management-generated sensitivity measures are predictive of future realized changes in net interest income. Second, we find financial analysts’ forecasts of net interest income reflect information provided by interest income sensitivity disclosures. Third, we find equity market responses to interest rate shocks as well as firms’ interest rate betas are larger for banks with greater disclosed sensitivity of net interest income to interest rate changes. Across all of these tests, the informativeness of income sensitivity measures is incremental to that of regulatory data. These results suggest that interest income sensitivity disclosures are informative measures of interest rate risk. Our results contradict assertions that these disclosures are useless due to lack of relevance of income sensitivity, poor modeling techniques, and/or redundancy relative to regulatory data.

Original languageEnglish (US)
Pages (from-to)117-146
Number of pages30
JournalAccounting Review
Volume96
Issue number1
DOIs
StatePublished - Jan 2021

Keywords

  • Disclosure usefulness
  • Interest income sensitivity disclosure
  • Interest rate risk

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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