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Does Managerial Opportunism Explain The Differential Pricing Of Level 3 Fair Value Estimates?

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  • Dahlia Robinson
  • Thomas Smith
  • Adrian Valencia

Abstract

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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  • Dahlia Robinson & Thomas Smith & Adrian Valencia, 2018. "Does Managerial Opportunism Explain The Differential Pricing Of Level 3 Fair Value Estimates?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 41(2), pages 253-289, June.
    • Handle: RePEc:bla:jfnres:v:41:y:2018:i:2:p:253-289
    DOI: 10.1111/jfir.12146
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    Cited by:

    1. Greiner, Michael & Lee, Jaegul, 2020. "A supply-side approach to corporate political activity: Performance consequences of ideologically driven CPA," Journal of Business Research, Elsevier, vol. 115(C), pages 25-37.
    2. Tobias Witter & Thorsten Sellhorn & Jens Müller & Vicky Kiosse, 2022. "Balance sheet smoothing," Berlin School of Economics Discussion Papers 0006, Berlin School of Economics.

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