Value Relevance of FAS 157 Fair Value Hierarchy Information and the Impact of Corporate Governance Mechanisms

Song, Choong Eui; Thomas, Wayne B.; Han, Yi

doi:10.2139/ssrn.1198142

Cited by 140 publications

(334 citation statements)

References 42 publications

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“…Song, Thomas, and Yi () and Goh et al () find that investors price Level 1 and Level 2 values higher than Level 3 values, consistent with a perceived lower reliability in the Level 3 estimates. However, these studies provide mixed evidence on whether the lower valuations for Level 3 assets may also be due to managerial incentives to manipulate these estimates.…”

Section: Introductionmentioning

confidence: 74%

“…Song, Thomas, and Yi () and Goh et al () document lower valuation multiples for Level 3 assets relative to Level 1 and Level 2, and suggest that this finding is due to the inherent measurement error present in Level 3 valuations. Findings from Magnan, Menini, and Parbonetti () suggest that analysts perceive that managers act opportunistically in measuring Level 3 fair values, so it is reasonable to suspect that capital markets would differentially price Level 3 assets lower if they suspect that Level 3 fair values have been opportunistically managed.…”

Section: Hypothesis Developmentmentioning

confidence: 95%

See 1 more Smart Citation

Does Managerial Opportunism Explain the Differential Pricing of Level 3 Fair Value Estimates?

Robinson

Smith

Valencia

2018

J of Financial Research

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Using hand‐collected Level 3 data, we find that banks near key capital ratios report higher unrealized gains in Level 3 assets, consistent with managers using Level 3 valuations to boost capital ratios. Additionally, we document an incremental pricing discount for Level 3 assets among these firms, suggesting that the pricing discount observed by prior research may not be entirely due to measurement error inherent in Level 3. Furthermore, we observe that this opportunistic behavior diminishes under the new Financial Accounting Standards Board disclosure regime, suggesting that the expanded disclosures may increase the value relevance and reliability of fair value measurements.

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Section: Introductionmentioning

confidence: 74%

Section: Hypothesis Developmentmentioning

confidence: 95%

Does Managerial Opportunism Explain the Differential Pricing of Level 3 Fair Value Estimates?

Robinson

Smith

Valencia

2018

J of Financial Research

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show abstract

“…Goh et al () and Song et al () empirically documented that the fair values are value relevant on all levels of the fair‐value hierarchy, but they also find a market discount for the less transparent estimates . Because of the opaqueness of the Level 3 inputs, both the Basel Committee on Banking Supervision and the Public Company Accounting Oversight Board (PCAOB) call for an especially high‐quality audit to add reliability to these estimates (Basel Committee on Banking Supervision, ; PCAOB, ).…”

Section: Background and Hypotheses Developmentmentioning

confidence: 99%

“…Thus, the quality of the audit should affect the link between firms' market values and their book values. In this vein, Song, Thomas, and Yi () showed that the market discount on Level 3 assets is less pronounced in those firms with a higher corporate governance score. In this paper, we focus on the auditors' strategies to deal with the valuation risk inherent in mark‐to‐model valuations.…”

Section: Introductionmentioning

confidence: 99%

Fool's gold or value for money? The link between abnormal audit fees, audit firm type, fair‐value disclosures, and market valuation

2019

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We analyze whether the audit firm type and abnormal audit fees are associated with the market valuation of banks' fair‐value assets. Our results indicate that different auditor types use different strategies when auditing fair values. First, we show that Big 4 auditors restrict the Level 3 valuations to the most illiquid assets. Thus, those banks audited by a Big 4 auditor have a lower proportion of Level 3 assets. Second, the market discount on the Level 3 assets is higher for the banks audited by a Big 4 auditor than for those audited by a non‐Big 4 auditor. Third, the discount on the Level 3 portfolios of banks with non‐Big 4 auditors is higher if the unexpected audit fees are high. Thus, non‐Big 4 auditors seem to allow more high‐uncertainty valuations but charge a risk premium. We find similar effects for industry‐specialist auditors.

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“…Following previous studies (Amir and Lev, 1996;Collins et al, 1997;Harris and Muller, 1999;Song et al, 2010;Barth et al, 2012), we use three value relevance metrics: the stock price metric, the stock return metric, and the cash flow metric. Following previous studies (Amir and Lev, 1996;Collins et al, 1997;Harris and Muller, 1999;Song et al, 2010;Barth et al, 2012), we use three value relevance metrics: the stock price metric, the stock return metric, and the cash flow metric.…”

Section: Regression Analysis For the Second Hypothesismentioning

confidence: 99%

The Impact of Investments in Pollution Reduction on Shareholder Wealth: Evidence from Taiwanese Manufacturing Companies

Chiu

Lin

Wang

2017

Corp Soc Responsibility Env

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This paper investigates the economic benefit of corporate pollution reduction expenditures and the value relevance of the Global Reporting Initiative (GRI) report. It utilizes a unique dataset of pollution reduction expenditures disclosed by Taiwanese manufacturing companies in their GRI reports. Economic profit is measured with Economic Value Added and Tobin's Q. The value relevance is measured with three benchmarks: stock returns, cash flows, and stock prices. The Generalized Method of Moments is adopted to control for potential endogeneity. This paper finds a positive relation between pollution reduction expenditure and corporate economic benefits, which suggests that managerial decisions aimed at pollution reduction are consistent with the interests of shareholders and of stakeholders. In addition, this paper finds that the G3.1 guideline provides relevant information in regard to firm value, while it plays merely a partial role in investors' investment decisions.

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Value Relevance of FAS 157 Fair Value Hierarchy Information and the Impact of Corporate Governance Mechanisms

Cited by 140 publications

References 42 publications

Does Managerial Opportunism Explain the Differential Pricing of Level 3 Fair Value Estimates?

Does Managerial Opportunism Explain the Differential Pricing of Level 3 Fair Value Estimates?

Fool's gold or value for money? The link between abnormal audit fees, audit firm type, fair‐value disclosures, and market valuation

The Impact of Investments in Pollution Reduction on Shareholder Wealth: Evidence from Taiwanese Manufacturing Companies

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