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Conditionally conservative fair value measurements


  • Badia, Marc
  • Duro, Miguel
  • Penalva, Fernando
  • Ryan, Stephen


Firms measure fair values using Level 2 or 3 inputs when items do not trade in liquid markets, limiting market discipline over the measurements. We provide evidence that firms holding higher proportions of financial instruments measured at Level 2 and 3 fair values report more conditionally conservative comprehensive income attributable to fair value measurements, consistent with firms trying to mitigate investors' discounting of the measurements. We further predict and find that this conditional conservatism (1) increases with governance mechanisms that increase the strength and persistence of firms' incentives to report conservatively and (2) decreases with firms’ earnings management incentives.

Suggested Citation

  • Badia, Marc & Duro, Miguel & Penalva, Fernando & Ryan, Stephen, 2017. "Conditionally conservative fair value measurements," Journal of Accounting and Economics, Elsevier, vol. 63(1), pages 75-98.
  • Handle: RePEc:eee:jaecon:v:63:y:2017:i:1:p:75-98
    DOI: 10.1016/j.jacceco.2016.10.006

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    References listed on IDEAS

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    Cited by:

    1. Urooj Khan & Alvis K. Lo, 2019. "Bank Lending Standards and Borrower Accounting Conservatism," Management Science, INFORMS, vol. 65(11), pages 5337-5359, November.
    2. Xu, Xiaolu, 2019. "The association between fair value measurements and banks' discretionary accounting choices11I thank Roger Graham (editor) and two anonymous reviewers for the suggestions and guidance that substantial," Advances in accounting, Elsevier, vol. 44(C), pages 108-120.

    More about this item


    Conditional conservatism; Fair value measurement; Disclosure;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting


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