Information asymmetry of fair value accounting during the financial crisis

Liao, Lin; Kang, Helen; Morris, Richard D.; Tang, Qingliang

doi:10.1016/j.jcae.2013.10.001

Cited by 35 publications

(35 citation statements)

References 61 publications

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“…Our findings with respect to recognized fair values (Levels 1, 2, and 3 for assets and Level 3 for liabilities) are consistent with the SFAS 157 value relevance studies and that of Liao et al. () and Riedl and Serafeim ().…”

Section: Resultssupporting

confidence: 92%

“…The results of model (2b), including all controls, are consistent with those of model (2a) except that the coefficient of Level 3 liabilities is negative and significantly related to bid-ask spread. Our findings with respect to recognized fair values (Levels 1, 2, and 3 for assets and Level 3 for liabilities) are consistent with the SFAS 157 value relevance studies and that of Liao et al (2013) and Riedl and Serafeim (2011). Notes:…”

Section: Multivariate Resultssupporting

confidence: 86%

“…() and Kolev () examine the value relevance of the SFAS 157 fair value hierarchy within the banking industry, generally finding that value relevance decreases as the opacity of the financial instruments increases (from Level 1 to Level 3). Riedl and Serafeim () document that banking firms’ equity betas increase monotonically from Level 1 to Level 3 and Liao et al () find a similar relation between information asymmetry and fair value levels.…”

Section: Related Literature and Hypothesesmentioning

confidence: 92%

“…With respect to the tone of the disclosures, the average proportion of matched words that convey a positive tone (POS) 12. Since we consider 2007 SFAS 157 disclosures as benchmark levels prior to the SEC's Division of Corporate Finance letters, we follow Riedl and Serafeim (2011) and Liao et al (2013) and estimate 2007 fair value assets and liabilities for the nonearly adopter firms. We base this estimate on the proportion of the particular fair value level to total assets of the first quarter of 2008 for each of the nonearly adopter firms.…”

Section: Research Modelmentioning

confidence: 99%

“…Early literature on SFAS 107 fair value disclosures does not provide consistent evidence that the market prices fair values of financial instruments (Barth, Beaver, and Landsman, 1996;Eccher, Ramesh, and Thiagarajan, 1996;Nelson, 1996). More recent literature documents that the SFAS 157 fair value hierarchy (Levels 1, 2, and 3) is associated with monotonically decreasing value relevance, increasing risk, and increasing information asymmetry (Song, Thomas, and Yi, 2010;Riedl and Serafeim, 2011;Liao, Kang, Morris, and Tang, 2013). Our study is concerned with examining whether additional, voluntary fair value disclosures can mitigate the adverse selection risk premium that market participants assess for relatively opaque Level 3 assets/liabilities.…”

Section: Introductionmentioning

confidence: 99%

See 4 more Smart Citations

Information Asymmetry and Voluntary SFAS 157 Fair Value Disclosures by Bank Holding Companies During the 2007 Financial Crisis

Weiss

Shon

2017

Accounting Perspectives

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We hand‐collect SFAS 157 voluntary fair value disclosures of 18 bank holding companies. The SEC's Division of Corporate Finance likely targeted these entities in 2008 through their “Dear CFO” letters in which they requested specific, additional disclosure items. We collect disclosures that match the SEC recommendations and create eight common factor disclosure variables to examine the effect of such disclosures on information asymmetry. We find that disclosure variables about the use of broker quotes or prices from pricing services and the use of market indices and illiquidity adjustments are related to lower information asymmetry. However, disclosure variables about valuation techniques and asset‐backed securities are related to greater information asymmetry. We also document that disclosure complexity, and disclosure tone (uncertainty and litigious) is related to greater information asymmetry. These findings are consistent with criticism that corporate disclosures are voluminous; management may obfuscate unfavorable information which in turn increases market participants’ assessment of uncertainty associated with the fair value measures. We caveat that the setting of the financial crisis and a small sample size may limit the ability to generalize these inferences to other time periods or other financial firms.

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Section: Resultssupporting

confidence: 92%

Section: Multivariate Resultssupporting

confidence: 86%