Does Managerial Opportunism Explain the Differential Pricing of Level 3 Fair Value Estimates?

57 Pages Posted: 28 Aug 2018

See all articles by Dahlia Robinson

Dahlia Robinson

University of South Florida

Thomas Joseph Smith

University of South Florida

Adrian Valencia

Florida Gulf Coast University - Department of Accounting, Finance & Business Law

Date Written: July 17, 2017

Abstract

Using hand collected Level 3 data, we find that banks near key capital ratios report higher unrealized gains in Level 3 assets, consistent with managers using unrealized gains in earnings from Level 3 valuations to boost capital ratios. Additionally, we document an incremental pricing discount for Level 3 assets among these firms, suggesting that the pricing discount observed by prior research may not be entirely due to measurement error inherent in Level 3. Further, we observe that this opportunistic behavior diminishes under the new FASB disclosure regime, suggesting that the expanded disclosures may increase the value relevance and reliability of fair value measurements.

Keywords: Mark-To-Market, Accounting, Earnings Management, Financial Crisis, Banks

JEL Classification: G14, G15, G30, K22, M41, M42

Suggested Citation

Robinson, Dahlia and Smith, Thomas Joseph and Valencia, Adrian, Does Managerial Opportunism Explain the Differential Pricing of Level 3 Fair Value Estimates? (July 17, 2017). Journal of Financial Research, Vol. 41, No. 2, 2018, Available at SSRN: https://ssrn.com/abstract=3234321

Dahlia Robinson

University of South Florida ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States
8139746888 (Phone)

Thomas Joseph Smith (Contact Author)

University of South Florida ( email )

4202 E. Fowler Avenue, BSN 3403
Tampa, FL 33620-5500
United States

Adrian Valencia

Florida Gulf Coast University - Department of Accounting, Finance & Business Law ( email )

Ft. Myers, FL 33965-6565
United States

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