Moving Towards Consensus: An Examination of Trends in Investment Fair Values

Abstract

A primary argument against fair value measurement is the lack of verifiability, where verifiability is defined as consensus in measurement by independent parties. In this study, we evaluate this argument by investigating trends in the consensus of reported fair values. Using a rich dataset that provides fair values of identical securities across all holders, we find that consensus has increased between 2005 and 2019 as evidenced by reductions in the fair value range and standard deviation. Further analyses indicate that enhanced data availability through public dissemination of trade information is a potential mechanism for why this trend exists. Additionally, we document that securities subject to testing by larger external auditors with more resources to take advantage of enhanced data availability are associated with a stronger trend in increasing consensus. Our results further show that trends toward greater consensus are stronger when management has a heightened opportunity to record a biased estimate, and also exist when examined at the insurer-security level using the difference from the mode reported value. While conventional arguments express concern over management’s ability to manipulate fair values, our results demonstrate patterns consistent with improved verifiability.

Keywords: fair value, investment security, verifiability, trends, insurance companies JEL classifications: G22

JEL Classification: G22, G31, M41