Reliability and Relevance of Fair Values: Private Equity Investments and Investee Fundamentals

42 Pages Posted: 1 Jun 2018 Last revised: 10 Mar 2019

See all articles by Petrus (Petri) Ferreira

Petrus (Petri) Ferreira

University of North Carolina (UNC) at Chapel Hill, Kenan-Flagler Business School, Accounting Area

Roman Kräussl

Luxembourg School of Finance; Hoover Institution, Stanford University

Wayne R. Landsman

University of North Carolina Kenan-Flagler Business School

Maria Borysoff (Nykyforovych)

George Mason University

Peter F. Pope

Bocconi University; London School of Economics and Political Science

Date Written: March 1, 2019

Abstract

We directly test the reliability and relevance of fair values reported by listed private equity firms (LPEs), where the unit of account for the fair value measurement (FVM) is an investment stake in an individual investee company. FVMs are observable for multiple investment stakes, fair values are economically important, and granular data on investee economic fundamentals that should underpin fair values are available in public disclosures. We find that valuations assessed by LPE fund managers reflect accounting-based fundamentals — equity book value and net income — in a manner consistent with the way in which stock prices reflect fundamentals of listed companies. Additionally, our findings are consistent with LPE fund managers’ fair value estimates reflecting the investee’s net income to a lesser extent when no direct market inputs are available. Thus, LPE fund managers appear to distinguish between Level 1 and Level 3 investments when valuing their investments. We also report evidence suggesting that investors perceive the judgments that LPE fund managers apply when determining investee valuations as reliable.

Keywords: Fair value, private equity, relevance and reliability

JEL Classification: G00, G12, M41

Suggested Citation

Ferreira, Petrus H. and Kraeussl, Roman and Landsman, Wayne R. and Borysoff (Nykyforovych), Maria and Pope, Peter F., Reliability and Relevance of Fair Values: Private Equity Investments and Investee Fundamentals (March 1, 2019). Review of Accounting Studies, Forthcoming, George Mason University School of Business Research Paper No. 18-11, Kenan Institute of Private Enterprise Research Paper No. 18-10, Available at SSRN: https://ssrn.com/abstract=3169909 or http://dx.doi.org/10.2139/ssrn.3169909

Petrus H. Ferreira

University of North Carolina (UNC) at Chapel Hill, Kenan-Flagler Business School, Accounting Area ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States

Roman Kraeussl

Luxembourg School of Finance ( email )

4, rue Albert Borschette
Luxembourg, 1246
Luxembourg
+3524666445442 (Phone)

HOME PAGE: http://www.art-finance.com

Hoover Institution, Stanford University ( email )

Stanford, CA 94305
United States

Wayne R. Landsman (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3221 (Phone)
919-962-4727 (Fax)

Maria Borysoff (Nykyforovych)

George Mason University ( email )

Fairfax, VA
United States

Peter F. Pope

Bocconi University ( email )

Dept of Accounting
Milan, 20136
Italy

London School of Economics and Political Science ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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