The Bright Side of Fair Value Accounting: Evidence from Private Company Valuation

Abstract

Using proprietary valuations from a large sample of international private equity managers, we examine how the use of fair value accounting improves the valuation of private companies. We find that the use of fair value accounting reduces valuation bias and increases valuation accuracy. These improvements are especially salient for the valuation of outperforming and mature private companies. Our findings provide novel evidence that fair value accounting improves the usefulness of financial reporting even in settings where valuations are subjective and unverifiable.

Keywords: Fair Value; Private Equity; Valuation; Private Company

JEL Classification: G11; G24; G32; M41