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Fair Value Accounting: Information or Confusion for Financial Markets?

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  • Antonio Parbonetti
  • Andrea Menini
  • Michel Magnan

    ()

Abstract

The recent financial crisis has led to a critical evaluation of the role that fair value accounting may have played in undermining the stability of the financial system. Reacting to the pressures of banking regulators and governments, standard-setters have brought forward additional guidance on the application of fair value accounting. This paper examines if and how fair value reporting by U.S. commercial banks during the 1996-2009 period influences the quality of information used by financial analysts. Our results show that, overall, the greater the extent of a bank’s assets and liabilities reported at fair value, the more dispersed are analysts’ earnings forecasts. Moreover, as the proportion of assets measured at fair value increases, properties of analysts’ forecasts become less desirable, showing a decrease in the precision of public or private information. The informational properties of fair value disclosure decrease as we move from level 2 to mark-to-model data (level 3). Nevertheless, additional analyses suggest that the disclosure of levels has been beneficial to investors as it enhanced private information precision resulting in more accurate and less dispersed analysts’ forecasts. Finally, the disclosure about the valuation of assets that are measured at fair value on a non-recurring basis reduces accuracy and public information precision while enhancing dispersion. La récente crise financière a amené une réévaluation du rôle que l’utilisation de la comptabilité à la juste valeur peut avoir sur la stabilité du système bancaire. Suite à l’intervention des organismes de réglementation des banques et de certains gouvernements, les normalisateurs comptables ont élaboré davantage les paramètres de mise en œuvre de la comptabilité à la juste valeur. Cette recherche examine si et comment l’utilisation de la comptabilité à la juste valeur par les banques américaines entre 1996 et 2009 a influencé la qualité de l’information accessible aux analystes financiers pour la préparation de leurs prévisions. Nos résultats montrent, qu’en général, plus grande est la proportion de l’actif et du passif d’une banque qui repose sur la comptabilité à la juste valeur, plus grande est la dispersion des prévisions de bénéfices effectuées par les analystes. En outre, une augmentation de la proportion de l’actif mesuré à la juste valeur est associée avec un environnement informationnel moins favorable pour les analystes (diminution dans la précision de l’information privée et de l’information publique). Cet effet est accentué pour l’actif ou le passif mesuré de niveau 3 (mesure selon modèle). Cependant, la décision récente de divulguer les niveaux d’évaluation à la juste valeur (niveaux 1, 2 et 3) a amélioré la précision et le consensus des prévisions de bénéfice des analystes. Finalement, la divulgation de l’évaluation d’actifs qui sont mesurés à la juste valeur mais sur une base ponctuelle et non-récurrente semble réduire la précision des prévisions de bénéfice.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 2011s-56.

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Date of creation: 01 Aug 2011
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Handle: RePEc:cir:cirwor:2011s-56

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Keywords: Fair value accounting; governance; risk management; earnings forecasts analysts; valuation of assets disclosure; Comptabilité à la juste valeur; gouvernance; prévisions de bénéfices des analystes; divulgation de l’évaluation d’actifs;

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References

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  1. Christof Beuselinck & Marc Deloof & Sophie Manigart, 2009. "Private Equity Involvement and Earnings Quality," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(5-6), pages 587-615.
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  7. Barth, Mary & Taylor, Daniel, 2010. "In defense of fair value: Weighing the evidence on earnings management and asset securitizations," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 26-33, February.
  8. Bandyopadhyay, Sati P. & Brown, Lawrence D. & Richardson, Gordon D., 1995. "Analysts' use of earnings forecasts in predicting stock returns: Forecast horizon effects," International Journal of Forecasting, Elsevier, vol. 11(3), pages 429-445, September.
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  10. Laux, Christian & Leuz, Christian, 2009. "The crisis of fair-value accounting: Making sense of the recent debate," Accounting, Organizations and Society, Elsevier, vol. 34(6-7), pages 826-834, August.
  11. Asquith, Paul & Mikhail, Michael B. & Au, Andrea S., 2005. "Information content of equity analyst reports," Journal of Financial Economics, Elsevier, vol. 75(2), pages 245-282, February.
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