Do Voluntary Disclosures that Disavow the Reliability of Mandated Fair Value Information Reflect Legitimate Concerns About Reliability?

52 Pages Posted: 22 May 2009 Last revised: 11 May 2014

See all articles by Walter G. Blacconiere

Walter G. Blacconiere

Indiana University - Kelley School of Business - Department of Accounting

James R. Frederickson

Melbourne Business School

Marilyn F. Johnson

Michigan State University - Department of Accounting & Information Systems

Melissa F. Lewis-Western

Brigham Young University - Marriott School of Business

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Date Written: May 22, 2009

Abstract

U.S. and international accounting standards have mandated recognition and/or disclosure of fair value information for an increasing number of items. One consequence of this shift has been the emergence of voluntary disclosures in audited financial statements that explicitly question the reliability of the mandated fair value information. We investigate whether these voluntary disclosures reflect legitimate concerns by examining whether the mandated fair value information is less reliable for firms that include such disclosures in the footnotes of their financial statements. We examine this issue in the context of the fair value estimate of employee stock options mandated by SFAS 123. After controlling for other motivations to disavow, we find that a firm is more likely to make a disavowal disclosure when inputs into its stock-option valuation model are less reliable. In contrast, we find little evidence that stock option disavowals are motivated by managers' desires to hide abnormally high compensation or downplay the detrimental impact of stock option expense on performance metrics. These findings are consistent with the FASB's view in SFAS 157 that supplemental disclosures related to fair value information are necessary for users to understand the information and limitations of fair value estimates. Surprisingly, we also find that disavowals are most common when Ernst and Young audited the financial statements. This result is interesting as it suggests that firms' disclosure policies are impacted by both firm-specific costs and benefits of disclosure and the opinions of third parties (which presumably increase the perceived benefits of the disclosure).

Keywords: fair value, disclosure, reliability, stock options

Suggested Citation

Blacconiere, Walter G. and Frederickson, James R. and Johnson, Marilyn F. and Lewis-Western, Melissa Fay, Do Voluntary Disclosures that Disavow the Reliability of Mandated Fair Value Information Reflect Legitimate Concerns About Reliability? (May 22, 2009). Available at SSRN: https://ssrn.com/abstract=1408709 or http://dx.doi.org/10.2139/ssrn.1408709

Walter G. Blacconiere

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2653 (Phone)
812-855-4985 (Fax)

James R. Frederickson

Melbourne Business School ( email )

200 Leicester Street
Carlton, Victoria 3053
Australia

Marilyn F. Johnson

Michigan State University - Department of Accounting & Information Systems ( email )

270 North Business Complex
East Lansing, MI 48824-1034
United States
517-432-0152 (Phone)
517-432-1101 (Fax)

Melissa Fay Lewis-Western (Contact Author)

Brigham Young University - Marriott School of Business ( email )

Provo, UT 84602
United States
801-703-8426 (Phone)

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