The Association between SFAS No. 157 Fair Value Hierarchy Information and Conditional Accounting Conservatism

Posted: 8 Nov 2017 Last revised: 11 Aug 2020

See all articles by Jonathan Black

Jonathan Black

Purdue University - Department of Accounting

Jeff Zeyun Chen

Texas Christian University

Marc Cussatt

Clemson University

Date Written: November 6, 2017

Abstract

Investors demand conditional conservatism to restrict managers’ ability to opportunistically exploit unverifiable accounting estimates. The fair value estimation process is subject to verifiability concerns when market prices are unavailable, and thus susceptible to managerial discretion. We explore whether banks’ exposure to less-verifiable fair value estimates is associated with conditional conservatism. General and bank-specific conservatism measures indicate that banks with greater proportions of less-verifiable fair value assets exhibit more conditional conservatism. Cross-sectional analyses provide evidence that this relation varies predictably with investor-demand and manager-supply proxies. Further analyses indicate that monitoring institutional investors drive the demand for conservatism. We identify high-quality auditors and board independence as two mechanisms used to invoke conservatism. Findings are robust to the exclusion of fair value earnings components, suggesting that the effect is not confined to fair value accounts. Together, our results indicate that less-verifiable fair value estimates generate demand for conditional conservatism in the financial industry.

Keywords: SFAS No. 157, fair value hierarchy, conditional conservatism, verifiability

JEL Classification: M41, G21

Suggested Citation

Black, Jonathan and Chen, Jeff Zeyun and Cussatt, Marc, The Association between SFAS No. 157 Fair Value Hierarchy Information and Conditional Accounting Conservatism (November 6, 2017). The Accounting Review, Volume 93, Issue 5, pp. 119 - 144, Available at SSRN: https://ssrn.com/abstract=3066009

Jonathan Black

Purdue University - Department of Accounting ( email )

Krannert School of Management
West Lafayette, IN 47907-1310
United States

Jeff Zeyun Chen (Contact Author)

Texas Christian University ( email )

2900 Lubbock Ave
Fort Worth, TX 76109
United States

Marc Cussatt

Clemson University ( email )

Clemson, SC 29631
United States

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