Publication Type

Journal Article

Version

Preprint

Publication Date

3-2015

Abstract

We investigate how investors price the fair value estimates of assets as required by Statement of Financial Accounting Standards No. 157 (SFAS 157) since the financial crisis in 2008. We observe that Level 3 fair value estimates are typically priced lower than Level 1 and Level 2 fair value estimates between 2008 and 2011. However, the difference between the pricing of the different estimates reduces over time, suggesting that as market conditions stabilize in the aftermath of the 2008 financial crisis, reliability concerns about Level 3 estimates dissipated to some extent. Next, we examine whether Level 3 gains affect the pricing of Level 3 estimates because managers have discretion to use Level 3 gains to manage earnings and asset values upwards. We find that differences in Level 3 gains do not lead investors to price Level 3 estimates differently. Finally, we find evidence that the pricing of the Level 1 and Level 2 fair value estimates of assets is lower for banks with lower capital adequacy. Overall, our study contributes to an improved understanding of the relation between valuation and fair value information.

Keywords

SFAS 157, valuation, fair value, mark-to-market, liquidity, audit quality

Discipline

Accounting | Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Corporate Reporting and Disclosure

Publication

Journal of Accounting and Public Policy

Volume

34

Issue

2

First Page

129

Last Page

145

ISSN

0278-4254

Identifier

10.1016/j.jaccpubpol.2014.12.002

Publisher

Elsevier

Copyright Owner and License

Authors

Creative Commons License

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

Additional URL

http://doi.org/10.1016/j.jaccpubpol.2014.12.002

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