The implication of unrecognized asset value on the relation between market valuation and debt valuation adjustment

Matthew C. Cedergren (), Changling Chen () and Kai Chen ()
Additional contact information
Matthew C. Cedergren: University of Pennsylvania
Changling Chen: University of Waterloo
Kai Chen: Wilfrid Laurier University

Review of Accounting Studies, 2019, vol. 24, issue 2, No 2, 426-455

Abstract: Abstract Under SFAS No. 159, U.S. firms can measure debt liabilities at fair value, which results in recognition of unrealized gains and losses from debt valuation adjustments (DVA) when a firm’s own credit risk changes. Critics have raised concerns about the counterintuitive income consequences of DVA; that is, when a firm’s credit risk increases (i.e., bad news), debt values decrease, and resulting DVA gains increase the firm’s income (i.e., good news), and vice versa. In this paper, we examine the relation between market valuation and DVA gains and losses, conditioning on the level of unrecognized asset value (UAV). We develop a model to demonstrate the mitigating effect of UAV on the relation between equity returns and DVA. We show that, while the association between equity returns and DVA is positive when the level of UAV is low, the association decreases and eventually turns negative with increasing levels of UAV.

Keywords: Debt valuation adjustment; Unrecognized asset value; Market valuation; Fair value of liabilities; Balance sheet incompleteness (search for similar items in EconPapers)
JEL-codes: G12 G21 M41 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://link.springer.com/10.1007/s11142-019-9486-2 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

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:spr:reaccs:v:24:y:2019:i:2:d:10.1007_s11142-019-9486-2

Ordering information: This journal article can be ordered from
http://www.springer.com/accounting/journal/11142

DOI: 10.1007/s11142-019-9486-2

Access Statistics for this article

Review of Accounting Studies is currently edited by Paul Fischer

More articles in Review of Accounting Studies from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().