Abstract

http://ssrn.com/abstract=1439851
 
 

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Information Risk and Fair Values: An Examination of Equity Betas


Edward J. Riedl


Boston University - School of Management

George Serafeim


Harvard University - Harvard Business School

2011

Journal of Accounting Research, 49, no. 4: 1083–1122.

Abstract:     
Using a sample of U.S. financial institutions, we exploit recent mandatory disclosures of financial instruments designated as fair value level 1, 2, and 3 to test whether greater information risk in financial instrument fair values leads to higher cost of capital. We derive an empirical model allowing asset-specific estimates of implied betas, and find evidence that firms with greater exposure to level 3 financial assets exhibit higher betas relative to those designated as level 1 or level 2. We further find that this difference in implied betas across fair value designations is more pronounced for firms with ex ante lower quality information environments: firms with lower analyst following, lower market capitalization, higher analyst forecast errors, or higher analyst forecast dispersion. Overall, the results are consistent with a higher cost of capital for more opaque financial assets, but also suggest that differences in firm’s information environments can mitigate information risk across the fair value designations.

Number of Pages in PDF File: 56

Keywords: banks, risk, fair value, financial instruments, SFAS 157

JEL Classification: G12, G14, G21, M41

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Date posted: July 28, 2009 ; Last revised: July 19, 2013

Suggested Citation

Riedl, Edward J. and Serafeim, George, Information Risk and Fair Values: An Examination of Equity Betas (2011). Journal of Accounting Research, 49, no. 4: 1083–1122.. Available at SSRN: http://ssrn.com/abstract=1439851

Contact Information

Edward J. Riedl
Boston University - School of Management ( email )
595 Commonwealth Avenue
Boston, MA MA 02215
United States
617-353-2317 (Phone)
George Serafeim (Contact Author)
Harvard University - Harvard Business School ( email )
381 Morgan Hall
Boston, MA 02163
United States
HOME PAGE: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=ovr&facId=15705
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