Who's the Fairest of Them All? Evidence from Closed-End Funds

2015 ◽  
Vol 91 (1) ◽  
pp. 207-227 ◽  
Author(s):  
Alastair Lawrence ◽  
Subprasiri Siriviriyakul ◽  
Richard G Sloan
Keyword(s):  
Value Relevance ◽  
Fair Value ◽  
Data Availability ◽  
Omitted Variable Bias ◽  
Level 3 ◽  
Closed End Funds ◽  
Level 1 ◽  
Variable Bias ◽  
Fair Value Measurements ◽  
Level 2

ABSTRACT Prior research examining the ASC 820 fair value hierarchy concludes that Level 3 fair value measurements are significantly less value-relevant than Level 1 and Level 2 fair value measurements. We reevaluate this conclusion using the closed-end fund setting, in which fair value measurements are available for substantially all assets. Contrary to prior research, we find that Level 3 fair values are of similar value relevance to Level 1 and Level 2 fair values. Our findings suggest that the results in previous research are attributable to correlated omitted variable bias arising from the absence of fair value data for most assets. JEL Classifications: M41; G12; G29. Data Availability: Data are publicly available from sources identified in the article.

Fair Value Measurements and Audit Fees: Evidence from the Banking Industry

2014 ◽  
Vol 33 (3) ◽  
pp. 33-58 ◽  
Author(s):  
Michael L. Ettredge ◽  
Yang Xu ◽  
Han S. Yi
Keyword(s):  
Positive Association ◽  
Audit Fees ◽  
Fair Value ◽  
Data Availability ◽  
Publicly Traded ◽  
Cost Efficiencies ◽  
Level 3 ◽  
Level 1 ◽  
Fair Value Measurements ◽  
Level 2

SUMMARY: Using publicly traded bank holding company data from 2008 through 2011, this paper documents that the proportions of fair-valued assets held by banks are positively associated with audit fees. The positive association between audit fees and the proportions of total assets that are fair-valued using Level 3 inputs is greater than its positive association with the proportions of total assets that are fair-valued using Level 1 or Level 2 inputs. These results are consistent with a hypothesized scenario in which audit effort increases in the difficulty of verifying asset fair values. We also document that bank specialist auditors, defined as in Behn, Choi, and Kang (2008), charge lower audit fees to bank clients on average, suggesting cost efficiencies passed to clients as lower fees. However, bank expert auditors charge more for auditing the proportions of total assets that are fair-valued. Overall, the results support concerns expressed by some observers that greater use of fair value measurements for financial instruments will trigger increased audit fees. Data Availability: All data used in this study are publicly available from the sources identified in the text.

Value Relevance of FAS No. 157 Fair Value Hierarchy Information and the Impact of Corporate Governance Mechanisms

2010 ◽  
Vol 85 (4) ◽  
pp. 1375-1410 ◽  
Author(s):  
Chang Joon Song ◽  
Wayne B. Thomas ◽  
Han Yi
Keyword(s):  
Corporate Governance ◽  
Value Relevance ◽  
Fair Value ◽  
Governance Mechanisms ◽  
Corporate Governance Mechanisms ◽  
Level 3 ◽  
Level 1 ◽  
The Impact ◽  
Fair Value Measurements ◽  
Level 2

ABSTRACT: Statement of Financial Accounting Standards No. 157 (FAS No. 157), Fair Value Measurements, prioritizes the source of information used in fair value measurements into three levels: (1) Level 1 (observable inputs from quoted prices in active markets), (2) Level 2 (indirectly observable inputs from quoted prices of comparable items in active markets, identical items in inactive markets, or other market-related information), and (3) Level 3 (unobservable, firm-generated inputs). Using quarterly reports of banking firms in 2008, we find that the value relevance of Level 1 and Level 2 fair values is greater than the value relevance of Level 3 fair values. In addition, we find evidence that the value relevance of fair values (especially Level 3 fair values) is greater for firms with strong corporate governance. Overall, our results support the relevance of fair value measurements under FAS No. 157, but weaker corporate governance mechanisms may reduce the relevance of these measures.

Fair value's effects on closed-end funds' discounts and premia: is level 3 the sole perpetrator?

2020 ◽  
Vol 46 (8) ◽  
pp. 1001-1022 ◽  
Author(s):  
Steve Fortin ◽  
Ahmad Hammami ◽  
Michel Magnan
Keyword(s):  
Relevant Information ◽  
Fair Value ◽  
Content Type ◽  
Level 3 ◽  
Closed End Funds ◽  
Level 1 ◽  
Value Hierarchy ◽  
Valuation Uncertainty ◽  
The Impact ◽  
Level 2

PurposeThis study examines the long-term link between fair valuation uncertainty and discounts/premia in closed-end funds. This study argues that, in exploring the close-end funds puzzle, prior research generally omits to consider the uncertainty surrounding the measurement of funds' financial disclosure, as reflected in the fair value hierarchy, when investment specialty differs across funds.Design/methodology/approachRegressions were employed to explore how the fair value hierarchy affects closed-end funds' discounts/premia when investment specialty differs. The authors also examine the effects pre- and post-2012 to explore if that relationship changes due to the additional disclosure requirements enacted at the end of 2011.FindingsThe authors find that the three levels of the fair value hierarchy have effects that vary according to a fund's specialty. For equity specialized funds, Level 3 significantly increases discounts and decreases premia, suggesting the impact of valuation uncertainty that underlies Level 3 estimates; this relationship disappears (decreases in severity) for premia (discount) experiencing funds post-2012. In contrast, Level 1 and Level 2 do not have any significant effect on discounts or premia except that post-2012, Level 2 begins to display discount decreasing effects. For bond specialized funds, no significant association was noted between premia and any of the fair value levels except that post-2012, Level 3 begins to display premium increasing effects. However, results are different for discounts. The authors note that Level 1 valuations significantly increase discounts, but only post-2012; Level 2 valuations significantly decrease discounts (pre- and post-2012), consistent with such estimates incorporating unique and relevant information; and Level 3 valuations do not have a significant effect on discounts.Originality/valueThe results of this study revisit prior evidence and indicate that results about the effects of fair value measurement and the closed-end funds' puzzle are sensitive to the period length being considered and the investment specialty of the fund. The authors also note that additional disclosure regarding Level 3 valuation inputs decreases market concern for valuation uncertainty and increases the liquidity benefits of investing in Level 3 carrying funds.

scholarly journals Do women on management board increase fair value relevance?

2017 ◽  
Vol 1 (1) ◽  
pp. 6-16 ◽  
Author(s):  
Patrick Velte
Keyword(s):  
Positive Impact ◽  
Value Relevance ◽  
Stock Exchange ◽  
Gender Diversity ◽  
Fair Value ◽  
Fair Value Accounting ◽  
Management Board ◽  
Level 3 ◽  
Level 1 ◽  
Level 2

The purpose of this paper is the link between women on management board and the value relevance of fair value accounting according to IFRS 13. The empirical quantitative study covers a sample of German companies listed at the Prime Standard of the Frankfurt Stock Exchange for the business years 2013-2015 (411 firm-year observations). Value relevance is measured by the modified Ohlson (1995) model and we separate fair value accounting in level 1, level 2 and level 3 fair values. Multiple regressions state that female members in the man-agement board do have a positive impact on the value relevance of fair value accounting according to IFRS 13. Surprisingly, gender diversity only has a significant impact on the value relevance of fair valued assets on level 1 and 2 (“mark to market”) but not on level 3 (“mark to model”).

Fair Value Accounting and Earnings Persistence: Evidence from International Banks

2017 ◽  
Vol 17 (1) ◽  
pp. 47-68 ◽  
Author(s):  
Daifei (Troy) Yao ◽  
Majella Percy ◽  
Jenny Stewart ◽  
Fang Hu
Keyword(s):  
Strong Association ◽  
Balance Sheet ◽  
Fair Value ◽  
Institutional Factors ◽  
Earnings Persistence ◽  
Legal Enforcement ◽  
International Banks ◽  
Level 3 ◽  
Fair Value Measurements ◽  
Level 2

ABSTRACT Using hand-collected data from a sample of 210 international banks during the period 2009 to 2013, we investigate whether fair value exposure, the proportion of financial assets measured at fair values, is associated with earnings persistence and whether the reliability of fair value measurements influences earnings persistence. We also examine whether the association between fair value measurements and earnings persistence is a function of institutional factors such as legal enforcement, the audit environment, and country-level auditor industry expertise. Results suggest that the use of fair values for balance sheet financial instruments enhances earnings persistence. Also, we find that the nondiscretionary fair value Level 1 assets (measured with observable inputs) are positively associated with earnings persistence, whereas the Level 2 assets (measured with indirectly observable inputs) and Level 3 assets (measured using unobservable inputs) are not associated with earnings persistence. We provide further evidence that there is a strong association between factors reflecting countrywide institutional structures and the predictive power of fair values based on discretionary measurement inputs (Level 2 and Level 3 assets) and we find that the moderating effect from these institutional factors is greater for Level 3 assets than for Level 2 assets. Additional tests suggest that the association between fair value estimates and earnings persistence is moderated by the classification of fair value assets (that is, through profit and loss versus other comprehensive income) and the reliability of fair value estimates.

scholarly journals Pengaruh Kepemilikan Institusional Terhadap Relevansi Nilai Informasi Hierarki Nilai Wajar

2020 ◽  
Vol 2 (3) ◽  
pp. 3012-3028
Author(s):  
Desni Ramadhani ◽  
Nurzi Sebrina
Keyword(s):  
Decision Making ◽  
Sampling Method ◽  
Stock Exchange ◽  
Institutional Ownership ◽  
Fair Value ◽  
Level 3 ◽  
Level 1 ◽  
Value Hierarchy ◽  
Positive Effect ◽  
Level 2

The purpose of this research is to examine the relevance of fair value hierarchy information and the effect of institutional ownership on the relevance of fair value hierarchy information. This research is a causal associative research with a quantitative approach. Research conducted on banking companies listed on the Indonesian Stock Exchange period 2015-2018, which were determined by purposive sampling method so that 37 companies were selected as samples. The hypotheses were tests using multiple regression. The results indicate that the fair value level 2 is more relevant than the level 1 and 3, this research proves that the fair value level 2 is relevant for decision making of investor. In subsequent tests, institutional ownership does not have a positive effect on the relevance of fair value level 1, level 2 and level 3.

Managerial ability and fair value accounting: evidence from nonfinancial firms

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Wray Bradley ◽  
Li Sun
Keyword(s):  
Design Methodology ◽  
Fair Value ◽  
Managerial Ability ◽  
Fair Value Accounting ◽  
Content Type ◽  
Level 3 ◽  
Level 1 ◽  
The Impact ◽  
Nonfinancial Firms ◽  
Level 2

Purpose The purpose of this study is to examine the relation between managerial ability and fair value inputs (measured as fair value intensity) for nonfinancial firms. Design/methodology/approach This study uses regression analysis to investigate the impact of managerial ability on the level of fair value inputs. Findings This study finds significant and positive relations between managerial ability and use of Level 1 and Level 2 fair value inputs. On the other hand, this study finds an insignificant relation between managerial ability and Level 3 inputs. Originality/value The findings contribute to two research streams. To the best of the author’s knowledge, this is perhaps the first study that directly examines the link between managerial ability and fair value inputs.

Auditor Task-Specific Expertise: The Case of Fair Value Accounting

2019 ◽  
Vol 95 (3) ◽  
pp. 1-32 ◽  
Author(s):  
Jaehan Ahn ◽  
Rani Hoitash ◽  
Udi Hoitash
Keyword(s):  
Work Experience ◽  
Audit Quality ◽  
Value Relevance ◽  
National Level ◽  
Fair Value ◽  
Quality Level ◽  
Disclosure Quality ◽  
Level 3 ◽  
Office Level ◽  
Level 2

ABSTRACT PCAOB inspections repeatedly indicate deficiencies in audits of fair-value (FV) estimates, prompting regulators to improve the related auditing standards. We predict that auditor task-specific FV expertise, gained from work experience during the audit of FV measurements, can contribute to higher audit quality. Utilizing FV-related restatements and comment letters, we find that expertise in auditing Level 3 FV estimates at the office level is associated with greater FV audit quality. Level 2 FV expertise or national level FV expertise is not associated with higher FV audit quality. Following the receipt of a comment letter, we further find that auditor FV expertise is associated with lower comment letter remediation costs and higher FV disclosure quality. Finally, we find that the value relevance of Level 3 FV disclosures increases with the extent of auditor FV expertise. Collectively, our results highlight that auditor fair value expertise contributes to the credibility and usefulness of FV disclosures.

Do Investors Perceive Marking-to-Model as Marking-to-Myth? Early Evidence from FAS 157 Disclosure

2019 ◽  
Vol 09 (02) ◽  
pp. 1950005 ◽  
Author(s):  
Kalin S. Kolev
Keyword(s):  
Stock Price ◽  
Positive Association ◽  
Fair Value ◽  
Market Prices ◽  
Early Evidence ◽  
Level 3 ◽  
Fas 157 ◽  
Net Assets ◽  
Level 1 ◽  
Level 2

Capitalizing on the disclosure mandated by FAS 157, I examine the equity market’s perception of the reliability of internally generated fair value estimates. For the sample of S&P 1,500 financial institutions for the first three quarters of 2008, I document a significantly positive association between stock price and fair values measured using unadjusted market prices (FAS 157 Level 1), other observable inputs (Level 2), and significant unobservable inputs (Level 3), with valuation coefficients generally increasing in the observability of the measurement inputs. Using the reconciliation of the change in Level 3 net assets, I then directly examine the periodic re-measurement of the fair value estimates and document a significantly positive association between Level 3 net gains and quarterly returns. This result manifests even among observations with thin capital cushion, poorer information environment, and weaker corporate governance. Collectively, the findings are consistent with the conjecture that investors perceive the management-provided, mark-to-model, fair value estimates sufficiently reliable to use in firm valuation and do not discard them as “markings-to-myth.”

Illiquid Assets and the Opacity Discount in Banks’ Valuation

2021 ◽  
Author(s):  
Giulio Anselmi
Keyword(s):  
Negative Relationship ◽  
Relative Weight ◽  
Fair Value ◽  
Book Value ◽  
Valuation Technique ◽  
Level 3 ◽  
Level 1 ◽  
The Impact ◽  
Level 2 ◽  
Illiquid Assets

The paper investigates the impact of fair value accounting for illiquid assets (so-called ‘Level 2’ and ‘Level 3’ assets by accounting rules) on banks’ valuation and focuses on the change in relative weight of Level 3 (the most opaque and illiquid assets) with respect to Level 2 assets. The boundary between Level 3 and Level 2 assets is blurred and less clear than the one between Level 1 and Level 2 assets. Such unclear borderline entails corporate governance issues and provides room for opportunistic behavior by managers to opt for less transparent instruments. The paper proposes the change in Level 3-to-Level 2 assets ratio as a new measure to capture deviations in the opacity of bank assets and suggests a negative relationship between this ratio and bank’s price-to-book value. The rationale behind this relationship is that market participants interpret growth in Level 3-to-Level 2 assets ratio as an increase in bank’s opacity, since Level 3 assets might be as illiquid as Level 2 assets with the benefit of a less transparent model-based valuation technique. Based on a sample of 33 European banks from 2009 to 2018, I find that an increase of 100[Formula: see text]bps in Level 3-to-Level 2 assets ratio is linked to a decrease of about 74[Formula: see text]bps in the price-to-book value. Results are robust for different measures of firm relative valuation and using a different measure of illiquidity in fair value assets holdings (Level 2-to-Level 1 assets ratio).

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