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

Publication Type

Conference Paper

Publication Date

8-2012

Abstract

This study examines how investors perceive fair value gains and losses arising from the adoption of the standard Statement of Financial Accounting Standards No. 159 The Fair Value Option for Financial Assets and Financial Liabilities (hereafter FAS 159). We find that there is a positive correspondence between a firm’s stock returns and FAS 159 gains and losses attributable to fair value changes in assets. However, we do not observe a similar relation for gains and losses arising from fair value changes in liabilities. The results provide support that there are different valuation implications from fair valuing liabilities as opposed to fair valuing assets. Specifically, investors may perceive the value implications of fair value changes from liabilities as less economically viable than those arising from changes in the fair values of assets. Further analyses provide support that FAS 159 gains and losses enable investors to better assess the underlying economic risk of the firm.

Discipline

Accounting | Corporate Finance

Research Areas

Corporate Governance, Auditing and Risk Management

Publication

American Accounting Association Annual Meeting

City or Country

Washington DC, USA

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