Fair Value‐related Information in Analysts’ Decision Processes: Evidence from the Financial Crisis

Abstract

We use a sample of conference calls and analyst research reports from international banks to examine how financial analysts request and communicate fair value-related information in their valuation process. We find that analysts devote considerable attention to fair valuerelated topics. Most of the conference call questions and references in research reports pertain to fair value reclassifications and fair value changes of liabilities resulting from banks' own credit risk. The accounting impact of these one-time effects during the financial crisis and a lack of corresponding firm disclosures help to explain the prevalence of these two topics. The content of the questions and references suggests that analysts have different motives for their interest in fair value-related information. While some analysts adjust reported earnings for unrecognised fair value changes of reclassified assets, most of the observed analysts exclude banks' own credit risk effects from reported earnings. Thus, the use of fair value-related information varies substantially across analysts and across instruments.

Fair value accounting: Current practice and perspectives for future research

“…This has been criticized as counterintuitive to the way in which gains and losses are typically viewed – that is, liabilities diminish (increase) as the firm's underlying financial condition deteriorates (improves) – and the results have been argued to be difficult to explain to creditors and investors (e.g., Chasteen & Ransom, 2007; Lipe, 2002; Reilly, 2007). Bischof, Daske, and Sextroh (2014), for instance, find in a sample of IFRS banks from 30 countries that analysts frequently ask management during conference calls about the effects of changes in a banks’ own credit risk on the fair value of liabilities. They also find that analysts typically exclude from reported earnings the impact of changes in a bank's own credit risk.…”

Demand for fair value accounting: The case of the asset revaluation boom in Korea during the global financial crisis

“…In the context of banks, Bischof, Daske, and Sextroh () document that analyst demand for fair value‐related information varies over time, across analysts, and across fair value topics.…”

The impact of IFRS goodwill reporting on financial analysts' equity valuation judgements: some experimental evidence

“…Such limitations are necessary when conducting experiments. It may be noted that with regard to information that reflects the application of complex accounting standards, a recent study suggests that analysts have difficulties in handling such information for valuation purposes even after participating in a conference call where the accounting numbers were presented and discussed (Bischof et al ., ). In addition, as commented on by the discussant, the requirement to respond quickly in the first stage of the experiment may have influenced the participants to rely on a greater degree of intuitive judgement than normal because they did not follow the company in question.…”

“…Second, this article provides further insight into analysts' information processing in the valuation context. As emphasised by Bradshaw (), the study of analysts' information processing is not easily accessed by archival studies and a number of more field‐based studies have recently been published, aiming at improving our understanding of how analysts use information for valuation purposes (Beccalli et al ., ; Bischof et al ., ; Abhayawansa et al ., ; Brown et al ., ). Earlier field‐based research by Barker (, , ) in this area suggests that the need for an immediate response based on basic information followed by more sophisticated analysis corresponds to the real‐life situation of many analysts.…”