Fair value accounting: information or confusion for financial markets?

Fair value accounting: information or confusion for financial markets? This paper examines whether and how fair value measurement and disclosure by US bank holding companies influences financial analysts’ ability to forecast earnings. Fair value measurement relates to more dispersed forecasts. Measurement basis disclosure (levels 1, 2 and 3) enacted by SFAS 157 translates into more accurate forecasts but has neutral effects for banks with a sizable proportion of assets at fair value. Furthermore, level 2 measurement relates to enhanced forecast accuracy, while level 3 measurement relates to increased forecast dispersion. These contrasting results reflect analysts’ underlying information environment, with level 2 measurement translating into higher quality private and public information and level 3 into reductions in the quality of private and public information. Results do not change after controlling for assets’ underlying riskiness. Overall, it appears that analysts perceive that managers convey useful information through level 2 figures but act opportunistically in measuring level 3 fair value figures. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Fair value accounting: information or confusion for financial markets?

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Publisher
Springer US
Copyright
Copyright © 2014 by Springer Science+Business Media New York
Subject
Economics / Management Science; Accounting/Auditing; Finance/Investment/Banking; Public Finance & Economics
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1007/s11142-014-9306-7
Publisher site
See Article on Publisher Site

Abstract

This paper examines whether and how fair value measurement and disclosure by US bank holding companies influences financial analysts’ ability to forecast earnings. Fair value measurement relates to more dispersed forecasts. Measurement basis disclosure (levels 1, 2 and 3) enacted by SFAS 157 translates into more accurate forecasts but has neutral effects for banks with a sizable proportion of assets at fair value. Furthermore, level 2 measurement relates to enhanced forecast accuracy, while level 3 measurement relates to increased forecast dispersion. These contrasting results reflect analysts’ underlying information environment, with level 2 measurement translating into higher quality private and public information and level 3 into reductions in the quality of private and public information. Results do not change after controlling for assets’ underlying riskiness. Overall, it appears that analysts perceive that managers convey useful information through level 2 figures but act opportunistically in measuring level 3 fair value figures.

Journal

Review of Accounting StudiesSpringer Journals

Published: Sep 9, 2014

References

  • The financial reporting of fair value based on managerial inputs versus market inputs: Evidence from mortgage servicing rights
    Altamuro, J; Zhang, H
  • The relevance of the value relevance literature for accounting standard setting: Another view
    Barth, ME; Beaver, WH; Landsman, WR
  • In defense of fair value: Weighing the evidence on earnings management and asset securitizations
    Barth, ME; Taylor, D
  • The financial reporting environment: Review of the recent literature
    Beyer, A; Cohen, DA; Lys, TZ; Walther, BR

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