Unintended Consequence: Fair Value Accounting Informs on Liquidity Risk

61 Pages Posted: 2 Sep 2009

See all articles by Baruch Lev

Baruch Lev

New York University - Stern School of Business

Nan Zhou

University of Cincinnati - Lindner College of Business

Date Written: 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.

Keywords: Fair value accounting, Economic Crisis, SFAS 157

JEL Classification: M41, G14

Suggested Citation

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

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

University of Cincinnati - Lindner College of Business ( email )

P.O. Box 210211
Cincinnati, OH 45221-0211
United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
748
Abstract Views
3,731
Rank
62,568
PlumX Metrics