How Do Fair Value Measurements of Financial Instruments Affect Investments in Banks?

Ralf Bergheim, Jürgen Ernstberger and Michael Roos ()

No 487, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: This paper experimentally investigates how fair value measurements of financial instruments affect the decision of nonprofessional investors to invest in a bank's shares. Specifically, we assess how investors respond to variations in net income resulting from fair value adjustments in trading assets and how the reliability of the fair value estimates affects their decision. We find that investment decreases as a result of transitions from the first to the third level and we even observe lower investments in case of positive changes in income. Investment decreases most if negative valuation adjustments are based on level 1 estimates suggesting that down pricing by the market is considered as a worse signal than model-based decreases in net income. For larger positive and negative adjustments the impact of valuation levels on investment turns out to be limited. Our results do not provide evidence that Fair Value Accounting per se induces pro-cyclical investment behavior.

Keywords: banks; fair value accounting; nonprofessional investors; investment decision; experiment (search for similar items in EconPapers)
JEL-codes: C91 G11 M41 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-acc, nep-ban and nep-exp
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/97312/1/786830425.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:487

DOI: 10.4419/86788555

Access Statistics for this paper

More papers in Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().