Assessing the Valuation and Risk Implications of Fair Value Accounting for Liabilities: Evidence from FAS 159's Reported Gains and Losses

Author

Sung Gon CHUNG, Singapore Management UniversityFollow
Gerald LOBO, University of Houston
Kevin OW YONG, Singapore Management UniversityFollow

Publication Type

Working Paper

Publication Date

1-2012

Abstract

This study examines the implications of fair value liability gains and losses arising from the adoption of Statement of Financial Accounting Standards No. 159 (hereafter FAS 159). We find a positive correspondence between a firm’s FAS 159 fair value liability gains and losses and stock returns. Further analysis indicates that fair value gains and losses from liabilities attributable to the change in a firm’s own credit risk, which are considered counter-intuitive by critics of fair value accounting for liabilities, are also positively related to returns. Lastly, we document that the volatility of earnings that incorporate FAS 159 liability fair value gains and losses is positively associated with market measures of firm risk. Our study contributes to the controversy over recognition of liability fair value gains and losses by providing direct empirical evidence that such gains and losses are perceived as economic income by market participants.

Keywords

Fair value accounting, FAS 159, value relevance, risk relevance

Discipline

Accounting | Corporate Finance

Research Areas

Financial Intermediation and Information

Citation

CHUNG, Sung Gon; LOBO, Gerald; and OW YONG, Kevin. Assessing the Valuation and Risk Implications of Fair Value Accounting for Liabilities: Evidence from FAS 159's Reported Gains and Losses. (2012).
Available at: https://ink.library.smu.edu.sg/soa_research/1051

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.