Abstract

http://ssrn.com/abstract=1466009
 
 

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Unintended Consequence: Fair Value Accounting Informs on Liquidity Risk


Baruch Lev


New York University - Stern School of Business

Nan Zhou


State University of New York at Binghamton - School of Management

August 15, 2009


Abstract:     
We examine in this study the usefulness to investors of the three-level liquidity risk disclosure under SFAS No. 157 through the innovative prism of investors’ reaction to 44 key events (e.g., Lehman’s demise) during late 2008, the peak of the world-wide financial crisis. If fair value accounting informs about the risks (illiquidity) of financial items, then investors’ reaction to the crisis events should be conditional on the three-level disclosure. We indeed find a pecking order of investors’ reaction: For negative - liquidity shrinking - events, investors’ adverse reaction is strongest for Level 3 (highest risk) items, followed by Levels 2 and 1 (often no reaction at all). The reverse holds for positive - liquidity expanding (TARP program, for example) - events. We thus document, for both financial and nonfinancial firms, an important, yet rarely discussed attribute of fair value accounting: Informing on liquidity risk.

Number of Pages in PDF File: 61

Keywords: Fair value accounting, Economic Crisis, SFAS 157

JEL Classification: M41, G14

working papers series


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Date posted: September 2, 2009  

Suggested Citation

Lev, Baruch and Zhou, Nan, Unintended Consequence: Fair Value Accounting Informs on Liquidity Risk (August 15, 2009). Available at SSRN: http://ssrn.com/abstract=1466009 or http://dx.doi.org/10.2139/ssrn.1466009

Contact Information

Baruch Itamar Lev (Contact Author)
New York University - Stern School of Business ( email )
40 West 4th Street, Suite 400
New York, NY 10012
United States
212-998-0028 (Phone)
212-995-4001 (Fax)
HOME PAGE: http://www.baruch-lev.com
Nan Zhou
State University of New York at Binghamton - School of Management ( email )
P.O. Box 6000
Binghamton, NY 13902-6000
United States
607-777-2401 (Phone)
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