THE ASSOCIATION BETWEEN SAVINGS-AND-LOANS DEVIATION FROM GAAP AND THEIR SURVIVAL

In the early 1980s, the Savings & Loans industry experienced heavy los ses resulting from Savings & Loans (S & Ls) having to pay more interes t for deposits than they were earning on their loans. Consequently, ma ny S & Ls were in danger of failure. In an effort to limit the number of failed S & Ls, regulators authorized S & Ls to voluntarily and unil aterally deviate from Generally Accepted Accounting Principles (GAAP) by marking fixed assets to market value and amortizing losses on the s ales of loans. These procedures were opposed by the Financial Accounti ng Standards Board and Securities and Exchange Commission because they violated GAAP and reduced the comparability of financial disclosure. Our study provides evidence on two policy-related questions: 1) was th e regulators' strategy successful in decreasing the likelihood of the failure of the S & Ls which adopted the procedures? 2) if so, did the S & Ls which were aided by the procedures merely survive to make the t ype of risky investments which exacerbated the cost of the S & L indus try bailout, as has been alleged? The results indicate that the S & Ls adopting the procedures were less likely to fail than non-adopters, a nd that surviving adopters experienced higher return on assets ratios (ROAs) in the mid-1980s than surviving non-adopters. However, these su rviving adopters increased their high-risk investments more than survi ving nonadopters, and by 1988 had lower ROAs. This evidence is consist ent with criticism that the procedures exacerbated the cost of the S & L bailout, and has implications for accounting regulation in possible similar crises such as are alleged to be imminent in the commercial b anking and insurance industries.