Information Risk and Fair Values: An Examination of Equity Betas

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

56 Pages Posted: 28 Jul 2009 Last revised: 19 Jul 2013

Edward J. Riedl

Boston University - Questrom School of Business

George Serafeim

Harvard University - Harvard Business School

Date Written: 2011

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.

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

JEL Classification: G12, G14, G21, M41

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: https://ssrn.com/abstract=1439851

Edward J. Riedl

Boston University - Questrom School of Business ( 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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