The implication of unrecognized asset value on the relation between market valuation and debt valuation adjustment

Cedergren, Matthew C.; Chen, Changling; Chen, Kai

doi:10.1007/s11142-019-9486-2

Cited by 10 publications

(18 citation statements)

References 22 publications

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“…Finally, while for accounting purposes an economic relationship of a financial liability own risk with a non-qualifying asset is deemed to be different from one with a financial asset at fair value through profit or loss, they are alike under the application of MM theory, hence they should lead to like value of the firm. This goes in the same direction as some empirical evidence like in Cedergren et al (2019). This contributes to prior empirical research about the effects of incomplete recognition of contemporaneous asset value changes in linking it to the accounting standards conventions that determine it.…”

Section: Contribution To Prior Research On Incomplete Recognition Of Contemporaneous Asset Valuesupporting

confidence: 68%

“…Chasteen et al, 2007 conceive such a penalty as an "insolvency put" of the owners to account for directly in equity. Chung et al, 2012 andCedergren et al, 2019 report a positive relationship between DVAs and stock returns, which however weakens as the level of unrecognized assets increases. Barth et al, 2008 find that counterintuitive income effects are primarily attributable to incomplete recognition of contemporaneous asset value changes.…”

Section: Literature Reviewmentioning

confidence: 98%

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Own Credit Risk Accounting, Modigliani-Miller Theorem, and the Fallacy of Counter-Intuitive Results

Bellandi¹

2021

IJBM

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Purpose: This article tests own credit risk accounting under Modigliani-Miller theory to determine whether there is a fundamental fallacy in the unsolved issue of counter-intuitive results. Design/methodology/approach: A system of equations derived from the MM theorem to own risk. Findings: Solutions to the wealth transfer hypothesis. Parameters of issuer and holder that nullify own credit risk gain/loss and impairment loss/gain. A theoretical framework is developed to reconcile accounting to Modigliani-Miller theory. If the MM theory is true, as generally it is held to be, the system of equations shows that the recognition of own credit gain or loss would arise from different accounting measurement bases of liability own risk versus assets impairment, and by not reflecting the rebound effect in liability fair value measurement, in both cases not a faithfully representation of the substance of the facts and circumstances. The former would require a re-alignment between impairment and financial liability measurement rules. The latter would require a rethinking of fulfillment vs. fair value measurement to these liabilities. In addition, given the tenet that the accounting does not recognize shareholder wealth transfer, the current financial performance dilemma can be solved by recognizing in equity the concept of capital maintenance adjustment. Originality: Rare, if not unique, innovative direct application of MM paradigm to own risk. Implications: Significant contribution to the debate on performance and OCI, counter-intuitive results and accounting mismatch, fulfilment value versus fair value, incomplete recognition of contemporaneous asset value, and the definition of income in the Conceptual Framework.

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Section: Contribution To Prior Research On Incomplete Recognition Of Contemporaneous Asset Valuesupporting

confidence: 68%

Section: Literature Reviewmentioning

confidence: 98%

Own Credit Risk Accounting, Modigliani-Miller Theorem, and the Fallacy of Counter-Intuitive Results

Bellandi¹

2021

IJBM

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“…In contrast to the above results, Chung et al. (2017b) and Cedergren, Chen, and Chen (2019) find some evidence in support of measuring liabilities at fair value by demonstrating that changes in the value of US financial firms’ liabilities measured at fair value are generally value relevant to investors. Regardless, neither of these studies considers whether and how investors or analysts view assets measured at fair value differently than liabilities measured at fair value.…”

Section: Usefulness Of Fair Value Measurementsmentioning

confidence: 74%

“…However, when Cedergren et al. (2019) consider the amount of unrecognized intangibles assets, they find that DVAs are positively related to equity returns when the level of unrecognized intangibles assets is low. Using a sample of 104 IFRS banks from 23 European countries, Fontes, Panaretou, and Peasnell (2018) find that the fair value measurement of assets is associated with noticeably lower information asymmetry and that this reduction is larger when banks also recognize DVAs.…”

Section: Usefulness Of Fair Value Measurementsmentioning

confidence: 98%

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Fair value accounting: Current practice and perspectives for future research

McDonough

Panaretou

Shakespeare

2020

Business Fin & Account

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A fundamental issue debated in the accounting literature centres on the appropriate basis for measuring firms' assets and liabilities.During the last several decades, scholars have generated a growing body of important insights about the use of the fair value measurement attribute in financial reports around the globe. In this paper, we provide an overview of the institutional background of fair value accounting and the associated accounting standards that prescribe the use of fair value measurements under International Financial Reporting Standards and Generally Accepted Accounting Principles in the US. We discuss and document the extent to which firms across different industries and accounting regimes recognize and disclose in their financial reports assets and liabilities measured at fair value and we reflect on aspects of the fair value accounting literature. In doing this, we identify several areas in which additional research can further our understanding of fair value measurements and disclosures. K E Y W O R D SFair value accounting, FASB, IASB

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What can we learn about credit risk from debt valuation adjustments?

et al. 2022

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Motivated by the debate about the introduction of the fair value option for (financial) liabilities (FVOL) and the requirement to recognize and separately disclose in financial statements debt valuation adjustments (DVAs), this study explores what we can learn about a firm’s credit risk from DVAs. Using a sample of US bank holding companies that elect the FVOL, we show that DVAs generally cannot be explained by the same factors that explain contemporaneous changes in bank’s credit quality. We further find that DVAs can explain future changes in credit risk when the fair value of liabilities is based on managerial inputs (Level 3). Overall our results suggest that managers have an information advantage in estimating credit risk and that DVAs provide inside information to the market.

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The implication of unrecognized asset value on the relation between market valuation and debt valuation adjustment

Cited by 10 publications

References 22 publications

Own Credit Risk Accounting, Modigliani-Miller Theorem, and the Fallacy of Counter-Intuitive Results

Own Credit Risk Accounting, Modigliani-Miller Theorem, and the Fallacy of Counter-Intuitive Results

Fair value accounting: Current practice and perspectives for future research

What can we learn about credit risk from debt valuation adjustments?

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