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Indiana University Bloomington

Department of Accounting

American Accounting Association Honored

In 2011, the American Accounting Association honored Patrick Hopkins, professor of accounting at the Kelley School, for his research impacting accounting practice. Read more>> 

Research and Publications

Journal Articles

Fair Value Accounting for Liabilities and Own Credit Risk

2008, Accounting Review

M Barth, Leslie Hodder, S Stubben


We find that equity returns associated with credit risk changes are attenuated by the debt value effect of the credit risk changes, as Merton (1974) predicts. We find that the relation between credit risk changes and equity returns is significantly less negative for firms with more debt-controlling for asset value changes, credit risk increases (decreases) are associated with equity value increases (decreases). This result obtains across credit risk levels. The relation is associated with changes in both expected cash flows and systematic risk, as reflected in analyst earnings forecasts and equity cost of capital. By inverting the Merton (1974) model, we provide descriptive evidence that if unrecognized debt value changes were recognized in income, but not unrecognized asset value changes, most credit upgrade (downgrade) firms would recognize lower (higher) income. These potentially counterintuitive income effects primarily are attributable to incomplete recognition of contemporaneous asset value changes. However, for a substantial majority of downgrade firms we find that recognized asset write-downs exceed unrecognized gains from debt value decreases. This mitigates concerns that income effects from recognizing changes in debt values would be anomalous for such firms.


Barth, M., L. Hodder and S. Stubben (2008), "Fair Value Accounting for Liabilities and Own Credit Risk," The Accounting Review, Vol. 83, No. 3, May, pp. 629-664.