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Fair value accounting: information or confusion for financial markets?

Author

Listed:
  • Michel Magnan

    (Concordia University
    CIRANO)

  • Andrea Menini

    (University of Padova)

  • Antonio Parbonetti

    (University of Padova)

Abstract

This paper examines whether and how fair value measurement and disclosure by US bank holding companies influences financial analysts’ ability to forecast earnings. Fair value measurement relates to more dispersed forecasts. Measurement basis disclosure (levels 1, 2 and 3) enacted by SFAS 157 translates into more accurate forecasts but has neutral effects for banks with a sizable proportion of assets at fair value. Furthermore, level 2 measurement relates to enhanced forecast accuracy, while level 3 measurement relates to increased forecast dispersion. These contrasting results reflect analysts’ underlying information environment, with level 2 measurement translating into higher quality private and public information and level 3 into reductions in the quality of private and public information. Results do not change after controlling for assets’ underlying riskiness. Overall, it appears that analysts perceive that managers convey useful information through level 2 figures but act opportunistically in measuring level 3 fair value figures.

Suggested Citation

  • 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.
    • Handle: RePEc:spr:reaccs:v:20:y:2015:i:1:d:10.1007_s11142-014-9306-7
    DOI: 10.1007/s11142-014-9306-7
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    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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