Fair Value Accounting: Information or Confusion for Financial Markets?

43 Pages Posted: 8 Sep 2011 Last revised: 7 Jul 2015

See all articles by Michel Magnan

Michel Magnan

Concordia University - Department of Accountancy

Andrea Menini

University of Padua

Antonio Parbonetti

University of Padua

Date Written: August 7, 2011

Abstract

The recent financial crisis has led to a critical evaluation of the role that fair value accounting may have played in undermining the stability of the financial system. Reacting to the pressures of banking regulators and governments, standard-setters have brought forward additional guidance on the application of fair value accounting. This paper examines if and how fair value reporting by U.S. commercial banks during the 1996-2009 period influences the quality of information used by financial analysts. Our results show that, overall, the greater the extent of a bank’s assets and liabilities reported at fair value, the more dispersed are analysts’ earnings forecasts. Moreover, as the proportion of assets measured at fair value increases, properties of analysts’ forecasts become less desirable, showing a decrease in the precision of public or private information. The informational properties of fair value disclosure decrease as we move from level 2 to mark-to-model data (level 3). Nevertheless, additional analyses suggest that the disclosure of levels has been beneficial to investors as it enhanced private information precision resulting in more accurate and less dispersed analysts’ forecasts. Finally, the disclosure about the valuation of assets that are measured at fair value on a non-recurring basis reduces accuracy and public information precision while enhancing dispersion.

Keywords: Fair value accounting, governance, risk management, earnings forecasts analysts, valuation of assets disclosure

Suggested Citation

Magnan, Michel and Menini, Andrea and Parbonetti, Antonio, Fair Value Accounting: Information or Confusion for Financial Markets? (August 7, 2011). Review of Accounting Studies (2015) Volume 20, Issue 1, pp 559-591; CIRANO - Scientific Publication No. 2011s-56. Available at SSRN: https://ssrn.com/abstract=1923841 or http://dx.doi.org/10.2139/ssrn.1923841

Michel Magnan

Concordia University - Department of Accountancy ( email )

Montreal, Quebec H3G 1M8
Canada

Andrea Menini (Contact Author)

University of Padua ( email )

Via 8 Febbraio 1848, 2
Padova, 35122
Italy

Antonio Parbonetti

University of Padua ( email )

Via del Santo 33
Padova, 35123
Italy
+39 049 8274261 (Phone)

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