Lifting the Veil on Fair Valuations: Evidence from Mutual Fund Holdings of Non-Traded Securities

51 Pages Posted: 4 Sep 2021 Last revised: 24 May 2022

See all articles by Paul E. Fischer

Paul E. Fischer

University of Pennsylvania; University of Pennsylvania - Accounting Department

David Haushalter

Pennsylvania State University - Mary Jean and Frank P. Smeal College of Business Administration

Brian P. Miller

Indiana University - Kelley School of Business - Department of Accounting

Kevin Pisciotta

University of Kansas - School of Business

Date Written: May 22, 2022

Abstract

An inherent benefit of fair value accounting relative to historical cost accounting is that it impounds relevant information into financial statements in a timely manner. Assessing the extent to which this benefit is realized, however, is often impossible because the fair value updates for individual assets are usually unobservable. To circumvent this problem, we exploit the increasing trend of mutual funds investing in private companies. Although the securities issued by these companies are not publicly traded, mutual funds are required to report the fair value they assign to these securities on a quarterly basis. We find that funds generally make little or no adjustment to these valuations between quarters, with a third of our observations making no adjustment. These sticky valuations reflect a lack of timeliness in that the subsequent revaluations can be predicted using the prior quarter returns of publicly-traded firms. We conjecture that one reason funds are reluctant to change valuations is that they are concerned about accusations of opportunistic valuations and, to manage this risk, revalue only when the case for revaluation is compelling or when there are significant enough gains from doing so. Consistent with our conjecture, we find that funds most often revalue their investments in non-traded securities around large publicly-observable firm-specific and market-wide events, and that some funds are more willing to accept revaluation risk when a revaluation can be particularly beneficial to the fund’s performance. Overall, our results suggest that fair value reporting incentives can lead to untimely and opportunistic revaluations.

Keywords: Fair Value Accounting, Mutual Funds, Performance Chasing, Private Firms

JEL Classification: G23, G32

Suggested Citation

Fischer, Paul E. and Fischer, Paul E. and Haushalter, David and Miller, Brian P. and Pisciotta, Kevin, Lifting the Veil on Fair Valuations: Evidence from Mutual Fund Holdings of Non-Traded Securities (May 22, 2022). Available at SSRN: https://ssrn.com/abstract=3916506 or http://dx.doi.org/10.2139/ssrn.3916506

Paul E. Fischer

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

University of Pennsylvania ( email )

PA
United States
215 573 7533 (Phone)

David Haushalter

Pennsylvania State University - Mary Jean and Frank P. Smeal College of Business Administration ( email )

University Park, PA 16802
United States
814-863-7969 (Phone)
814-865-3362 (Fax)

Brian P. Miller

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2606 (Phone)

Kevin Pisciotta (Contact Author)

University of Kansas - School of Business ( email )

Capital Federal Hall
1654 Naismith Dr
Lawrence, KS 66045
United States

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