Pricing of Fair Values During the Financial Crisis: International Evidence

Abstract:     
In the course of the financial crisis, fair value accounting has been subject to intense debate among practitioners and academics. In particular, fair value measures have been deemed to be unreliable, as markets for certain positions became illiquid. This paper investigates whether the value relevance of fair values changes during the crisis. Furthermore, we examine whether institutional factors influence the market valuation of fair values. Using a global sample of 322 banks that apply IFRS, we hand-collect data on recognized fair values for the years 2006, 2007, and 2008. Applying a modified Ohlson (1995) model, we expect and find that (1) fair values are value relevant; (2) the pricing of fair values differs across firm-specific and institutional factors; and (3) fair values experience a substantial discount during the financial crisis. Overall, our findings raise concerns about the general reliability of fair values and support certain arguments provided by opponents of fair value accounting.

Number of Pages in PDF File: 48

Keywords: Fair Value, Financial Crisis, Value Relevance, International Accounting

JEL Classification: G18, G21, M41, N20

working papers series