Does fair value accounting contribute to market price volatility? An experimental approach

Carl Brousseau, Michel Gendron, Philippe Bélanger, Jonathan Coupland and Gary Monroe

Accounting and Finance, 2014, vol. 54, issue 4, 1033-1061

Abstract: type="main" xml:id="acfi12030-abs-0001">

This paper contributes to the debate on the impact of accounting measurement rules for financial assets. We examine the association between fair value accounting for financial assets and market price volatility for nonfinancial firms in an experimental setting. One group of participants was provided with financial statements where held-for-trading securities were reported at fair market value (FVA). Another group received financial statements with investments reported at historical cost (HCA). Controlling for accounting data, we find no systematic difference between FVA and HCA for three different measures of market price volatility, despite higher earnings volatility and marginally heavier trading under FVA.

Date: 2014
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