Market Pricing of Banks’ Fair Value Assets Reported under SFAS 157 since the 2008 Financial Crisis

36 Pages Posted: 7 May 2014 Last revised: 15 Oct 2014

See all articles by Beng Wee Goh

Beng Wee Goh

Singapore Management University - School of Accountancy

Dan Li

Tsinghua University - School of Economics and Management

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance

Kevin Ow Yong

Singapore Institute of Technology

Date Written: April 1, 2014

Abstract

We investigate how investors price the fair value estimates of assets as required by Statement of Financial Accounting Standards No. 157 (SFAS 157) since the financial crisis in 2008. We observe that Level 3 fair value estimates are typically priced lower than Level 1 and Level 2 fair value estimates between 2008 and 2011. However, the difference between the pricing of the different estimates reduces over time, suggesting that as market conditions stabilize in the aftermath of the 2008 financial crisis, reliability concerns about Level 3 estimates dissipated to some extent. Next, we examine whether Level 3 gains affect the pricing of Level 3 estimates because managers have discretion to use Level 3 gains to manage earnings and asset values upwards. We find that differences in Level 3 gains do not lead investors to price Level 3 estimates differently. Finally, we find evidence that the pricing of the Level 1 and Level 2 fair value estimates of assets is lower for banks with lower capital adequacy. Overall, our study contributes to an improved understanding of the relation between valuation and fair value information.

Keywords: SFAS 157, valuation, fair value, mark-to-market, liquidity

JEL Classification: G14, G21, M41, C21

Suggested Citation

Goh, Beng Wee and Li, Dan and Ng, Jeffrey and Yong, Kevin Ow, Market Pricing of Banks’ Fair Value Assets Reported under SFAS 157 since the 2008 Financial Crisis (April 1, 2014). Journal of Accounting and Public Policy, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2432912

Beng Wee Goh

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Dan Li

Tsinghua University - School of Economics and Management ( email )

Beijing, 100084
China

Jeffrey Ng (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Kevin Ow Yong

Singapore Institute of Technology

10 Dover Drive
Singapore, 138683
Singapore

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