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Value Relevance of the Fair Value Hierarchy of IFRS 7 in Europe - How reliable are mark-to-model Fair Values ?

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  • Bosch, Patrick

Abstract

According to IFRS 7, banks have to disclose the inputs used in measuring the fair value of financial instruments. For this purpose the standard defines a three-level measurement hierarchy. The reliability of fair values is expected to decrease with decreasing hierarchy level due to the lower quality of the input factors. Using a value relevance research setting, I find that investors perceive the reliability of level 3 fair values as significantly lower than the reliability of level 1 fair values. However, in contrast to expectations, level 2 fair values are not perceived as less reliable. Thus, investors only doubt the reliability of fair values whose inputs are based on discretionary assumptions. Additionally, this paper analyses the impact of the reclassification of financial assets and of the regulatory capital ratio on the reliability of fair values. While I find a weakly significant impact of the regulatory capital ratio, the reclassification has in general no influence on the reliability of reported fair values.

Suggested Citation

  • Bosch, Patrick, 2012. "Value Relevance of the Fair Value Hierarchy of IFRS 7 in Europe - How reliable are mark-to-model Fair Values ?," FSES Working Papers 439, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
  • Handle: RePEc:fri:fribow:fribow00439
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    File URL: http://doc.rero.ch/record/30782/files/WP_SES_439.pdf
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    1. repec:bla:joares:v:36:y:1998:i::p:199-233 is not listed on IDEAS
    2. Eccher, Elizabeth A. & Ramesh, K. & Thiagarajan, S. Ramu, 1996. "Fair value disclosures by bank holding companies," Journal of Accounting and Economics, Elsevier, vol. 22(1-3), pages 79-117, October.
    3. Ahmed, Anwer S. & Takeda, Carolyn, 1995. "Stock market valuation of gains and losses on commercial banks' investment securities An empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 20(2), pages 207-225, September.
    4. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    5. Geoffrey Whittington, 2008. "Fair Value and the IASB/FASB Conceptual Framework Project: An Alternative View," Abacus, Accounting Foundation, University of Sydney, vol. 44(2), pages 139-168.
    6. 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.
    7. Plantin, G. & Sapra, H. & Shin, H S., 2008. "Fair value accounting and financial stability," Financial Stability Review, Banque de France, issue 12, pages 85-94, October.
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    Cited by:

    1. Emanuel Bagna & Giuseppe Di Martino & Davide Rossi, 2014. "An anatomy of the Level 3 fair-value hierarchy discount," DEM Working Papers Series 065, University of Pavia, Department of Economics and Management.

    More about this item

    Keywords

    Fair Value Hierarchy; Reclassification; Reliability; Value Relevance;

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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