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The financial reporting of fair value based on managerial inputs versus market inputs: evidence from mortgage servicing rights

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  • Jennifer Altamuro

    (The Ohio State University)

  • Haiwen Zhang

    (The Ohio State University)

Abstract

This research examines whether the fair value of mortgage servicing rights (MSRs) based on managerial inputs (Level 3) better reflects the cash flow and risk characteristics of the underlying assets than the fair value of MSRs based on market inputs (Level 2). Using mortgage servicing fees as a proxy for the underlying cash flows, we find that the valuation multiples for MSRs based on Level 3 inputs are more positively associated with the persistence of future servicing fees compared with the fair value of MSRs based on Level 2 inputs. We also document that only the valuation multiples based on Level 3 fair values are negatively associated with proxies for risk factors. Our results suggest that, although unobservable inputs are subject to managerial discretions, managers can generate higher quality fair value estimates than market inputs due to their information advantage, especially when the market for the underlying asset is inactive.

Suggested Citation

  • Jennifer Altamuro & Haiwen Zhang, 2013. "The financial reporting of fair value based on managerial inputs versus market inputs: evidence from mortgage servicing rights," Review of Accounting Studies, Springer, vol. 18(3), pages 833-858, September.
    • Handle: RePEc:spr:reaccs:v:18:y:2013:i:3:d:10.1007_s11142-013-9234-y
    DOI: 10.1007/s11142-013-9234-y
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    References listed on IDEAS

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    1. Sloan, Richard G., 1999. "Evaluating the reliability of current value estimates1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 193-200, January.
    2. 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.
    3. Muller III, Karl A., 1999. "An examination of the voluntary recognition of acquired brand names in the United Kingdom1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 179-191, January.
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    6. Christian Laux & Christian Leuz, 2010. "Did Fair-Value Accounting Contribute to the Financial Crisis?," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 93-118, Winter.
    7. Altamuro, Jennifer & Beatty, Anne, 2010. "How does internal control regulation affect financial reporting?," Journal of Accounting and Economics, Elsevier, vol. 49(1-2), pages 58-74, February.
    8. Buttimer, Richard Jr. & Lin, Che-Chun, 2005. "Valuing US and Canadian mortgage servicing rights with default and prepayment," Journal of Housing Economics, Elsevier, vol. 14(3), pages 194-211, September.
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    Cited by:

    1. Michel Magnan & Andrea Menini & Antonio Parbonetti, 2015. "Fair value accounting: information or confusion for financial markets?," Review of Accounting Studies, Springer, vol. 20(1), pages 559-591, March.

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    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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