Re‐exploring Fair Value Accounting and Value Relevance: An Examination of Underlying Securities

Fortin, Steve; Hammami, Ahmad; Magnan, Michel

doi:10.1111/abac.12186

Cited by 4 publications

(3 citation statements)

References 51 publications

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“…MF 46,8 2. We do not examine the specific investments held in funds' portfolios due to data limitation purposes and because a concurrent study (Fortin et al, 2019) examines that angle.…”

Section: Discussionmentioning

confidence: 99%

“…5. Other authors suggest that the levels disclosure may embed private information (Magnan et al, 2015) or other security-based characteristics (nature and complexity, as suggested by Ramanna and Watts, 2009;Dechow et al, 2010 andFortin et al, 2019).…”

Section: Discussionmentioning

confidence: 99%

“…Splitting the data into two sub-periods around 2012 allows us to explore if the ASC-820 update that requires additional descriptive disclosures relating to the Level 3, which was implemented at the end of 2011, altered the relationship between FV levels and discounts and premia). Prior research shows that an investment's type does matter in terms of its valuation (Carroll et al, 2003;Fortin et al, 2019). Hence, we expect funds that specialize in equities to experience FV related discounts or premia differently than funds that specialize in bonds.…”

Section: Introductionmentioning

confidence: 95%

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

Fortin

Hammami

Magnan

2020

Self Cite

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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.

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“…MF 46,8 2. We do not examine the specific investments held in funds' portfolios due to data limitation purposes and because a concurrent study (Fortin et al, 2019) examines that angle.…”

Section: Discussionmentioning

confidence: 99%

Section: Discussionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 95%

See 1 more Smart Citation

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

Fortin

Hammami

Magnan

2020

Self Cite

View full text Add to dashboard Cite

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The Value Relevance of Fair Value Levels: Time Trends under IFRS and U.S. GAAP

Filip

Hammami

Huang

et al. 2021

Accounting in Europe

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Fair value accounting and the cost of corporate bonds: the role of auditor expertise

Magnan,

Wang,

Shi

2023

JFRA

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Purpose This study aims to examine the association between fair value accounting and the cost of corporate bonds, proxied by bond yield spread. In addition, this study explores the moderating role of auditor industry expertise at both the national and the city levels. Design/methodology/approach This study first examines the effect of the use of fair value on yield spread by estimating firm-level regression model, where fair value is the testing variable and yield spread is the dependent variable. To test the differential impact of the three levels of fair value inputs, this paper divides the fair value measures based on the three-level hierarchy, Level 1, Level 2 and Level 3, and replace them as the test variables in the regression model. Findings This study finds that the application of fair value accounting is generally associated with a higher bond yield spread, primarily driven by Level 3 estimates. The results also show that national-level auditor industry expertise is associated with lower bond yield spreads for Level 1 and Level 3 fair value inputs, whereas the impact of city-level auditor industry expertise on bondholders is mainly on Level 3 fair value inputs. Research limitations/implications The paper innovates by exploring the impact of fair value accounting in a setting that extends beyond financial institutions, the traditional area of focus. Moreover, most prior research considers private debt, whereas this study examines public bonds, for which investors are more likely to rely on financial reporting for their information about a firm. Finally, the study differentiates between city- and national-level industry expertise in examining the role of auditors. Practical implications This research has several practical implications. First, firms seeking to raise debt capital should consider involving auditors, with either industry expertise or fair value expertise, due to the roles that auditors play in safeguarding the reliability of fair value measures, particularly for Level 3 measurements. Second, from standard-setting and regulatory perspectives, the study’s findings that fair value accounting is associated with higher bond yield spread cast further doubt on the net benefits of applying a full fair value accounting regime. Third, PCAOB may consider enhancing guidance to auditors on Level 2 fair value inputs, to further enhance audit quality. Finally, creditors can be more cautious in interpretating accounting information based on fair value while viewing the employment of auditor experts as a positive signal. Originality/value First, the paper extends research on the role of accounting information in public debt contracting. Second, this study adds to the auditing literature about the impact of industry expertise. Finally, and more generally, this study adds to the ongoing controversy on the application of fair value accounting.

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Re‐exploring Fair Value Accounting and Value Relevance: An Examination of Underlying Securities

Cited by 4 publications

References 51 publications

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

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

The Value Relevance of Fair Value Levels: Time Trends under IFRS and U.S. GAAP

Fair value accounting and the cost of corporate bonds: the role of auditor expertise

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