Fair value accounting: information or confusion for financial markets?

Michel Magnan (), Andrea Menini () and Antonio Parbonetti ()
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Michel Magnan: Concordia University
Andrea Menini: University of Padova
Antonio Parbonetti: University of Padova

Review of Accounting Studies, 2015, vol. 20, issue 1, No 18, 559-591

Abstract: 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.

Keywords: Fair value accounting; Valuation of assets disclosure; Analysts’ earnings forecasts; Mandatory disclosure (search for similar items in EconPapers)
JEL-codes: G12 G21 M41 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s11142-014-9306-7

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