Volume 8, Issue 4, July 2020, Page: 199-207
Differences in the Reliability of Fair Value Hierarchy Measurements: A Cross-Country Study
Chu Yeong Lim, Nanyang Business School, Nanyang Technological University, Singapore
Gary Pan, School of Accountancy, Singapore Management University, Singapore
Kevin Ow Yong, Design and Specialized Business Cluster, Singapore Institute of Technology, Singapore
Received: Jun. 19, 2020;       Accepted: Jul. 16, 2020;       Published: Aug. 5, 2020
DOI: 10.11648/j.jfa.20200804.15      View  98      Downloads  41
Abstract
Prior research suggests there are significant differences in how investors perceive the reliability of fair values. An unaddressed question in this stream of research is whether cross-country differences in institutional factors can mediate differences in reliability for the fair value hierarchy measurements. We contribute to the research on fair value accounting by examining the impact of institutional factors toward the perceived reliability of fair value measurements in an international context. Based on an international sample of banks across twenty different countries, we find that the probability of crash risk is lower among countries with better financial development infrastructure, greater level of trust, tighter security regulations and higher level of disclosure requirements. These results apply to Level 1 assets but not to Level 2 and Level 3 assets. We also document that these cross-country factors improve the trading volume of our sample banks. Our study provides early evidence suggesting that fair value measurements across the fair value hierarchy are impacted by a country’s institutional background and financial development as well as the extent of its securities regulation and disclosure level. Our study suggests that there are ongoing concerns toward opaque fair values which are not fully eliminated by institutional differences. In addition, these differences matter in influencing investor willingness to trade in these stocks.
Keywords
Fair Value Accounting, Institutional Factors, Reliability
To cite this article
Chu Yeong Lim, Gary Pan, Kevin Ow Yong, Differences in the Reliability of Fair Value Hierarchy Measurements: A Cross-Country Study, Journal of Finance and Accounting. Vol. 8, No. 4, 2020, pp. 199-207. doi: 10.11648/j.jfa.20200804.15
Copyright
Copyright © 2020 Authors retain the copyright of this article.
This article is an open access article distributed under the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
Reference
[1]
Ashbaugh, H., Gassen, J., & Lafond, R. (2005). Does stock price synchronicity reflect information or noise? The international evidence. Working paper. University of Wisconsin – Madison
[2]
Barron, O., Chung, S. G., & Yong K. O. (2016). The effect of Statement of Financial Accounting Standards No. 157 fair value measurements on analysts’ information environment. Journal of Accounting and Public Policy, 35, 395-416.
[3]
Barth, J., Caprio, G., & Levine, R. (2003). Bank supervision and regulation: What works best? Journal of Financial Intermediation 13, 205–248.
[4]
Bell, T. B., & Griffin, J. B. (2012). Commentary on auditing high-uncertainty fair value estimates. Auditing: A Journal of Practice and Theory, 31, 147-155.
[5]
Bleck, A., & Liu. X. (2007). Market transparency and the accounting regime. Journal of Accounting Research 45: 229–256.
[6]
Chung, S. G., Goh, B. W., Ng, J., & Yong K. O. (2017). Voluntary fair value disclosures beyond SFAS 157’s three-level estimates. Review of Accounting Studies, 22, 430-468.
[7]
Christensen, B. E., Glover, S. M., & Wood, D. A. (2012). Extreme estimation uncertainty in fair value estimates: Implications for audit assurance. Auditing: A Journal of Practice & Theory, 31, 127-146.
[8]
Christensen, H. B. Hail, L., & Leuz C. (2013). Mandatory IFRS reporting and changes in enforcement. Journal of Accounting and Economics 56 (2-3), 147-177.
[9]
DeFond, M. L., Hung, M., Li, S., & Li, Y. (2015). Does mandatory IFRS adoption affect crash risk? The Accounting Review 90 (1), 265-299.
[10]
Durnev, A., Morck, R., Yeung, B., & Zarowin, P. (2003). Does greater firm-specific return variation mean more or less informed stock pricing? Journal of Accounting Research 41 (5), 797–836.
[11]
European Central Bank. 2004. Fair value accounting and financial stability. Occasional Paper Series 13, 3–48.
[12]
Financial Accounting Standards Board, (2006). Statement of Financial Accounting Standards No. 157, Fair Value Measurements. Norwalk, CT: FASB.
[13]
Gambetta, D. (1988). Trust: Making and breaking cooperative relations. Oxford: Blackwell.
[14]
Goh, B. W., Li, D., Ng, J. & Yong, K. O. (2015). Market pricing of banks’ fair value assets reported under SFAS 157 since the 2008 financial crisis. Journal of Accounting and Public Policy, 34 (2), 129-145.
[15]
Guiso, L., Sapienza, P., & L. Zingales, (2004). The role of social capital in financial development. American Economic Review, 94, 526-556.
[16]
Hail, L. & Leuz, C. (2006). International differences in the cost of equity capital: Do legal institutions and securities regulation matter? Journal of Accounting Research, 44 (3): 485–531.
[17]
He, X., T. J. Wong, & Young D. (2012). Challenges for Implementation of fair value accounting in emerging markets: Evidence from China. Contemporary Accounting Research, 29 (2): 538-562.
[18]
Hutton, A. P., A. J. Marcus, & H. Tehranian. (2009). Opaque financial reports, R2, and crash risk. Journal of Financial Economics 94 (1), 67–86.
[19]
International Accounting Standards Board. (2006). IFRS 7: Financial Instruments: Disclosure. London, UK: IASB
[20]
International Accounting Standards Board. (2011). IFRS 13: Fair Value Measurement. London, UK: IASB
[21]
Jin, L., & Myers, S. (2006). R2 around the world: New theory and new tests. Journal of Financial Economics, 79 (2), 257-292.
[22]
Kim, J-B., & Zhang, L. (2014). Financial reporting opacity and expected crash risk: Evidence from implied volatility smirks. Contemporary Accounting Research, 31 (3), 851-875.
[23]
LaPorta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny. R. (1999). The quality of government. Journal of Law, Economics and Organization 15 (1), 222-279.
[24]
LaPorta, R., Lopez-de-Silanes, F., & Shleifer, A. (2006). “What Works in Securities Laws?.” Journal of Finance 61 (1), 1-32.
[25]
Lim, C. Y., Ng, J., Pan, G., & Yong, K. O. (2018). Trust in Fair Value Accounting: Evidence from the Field. Working Paper. Singapore Institute of Technology.
[26]
Magnan, M., Menini, A., & Parbonetti, A. (2014). Fair value accounting: Information or confusion for financial markets. Review of Accounting Studies, 20 (1), 559-591.
[27]
Morck, R., Yeung, B., & Yu, W. (2000). The information content of stock markets: Why do emerging markets have synchronous stock price movements? Journal of Financial Economics, 58 (1-2), 215-260.
[28]
Nanda, D., & Wysocki, P. (2013). Trust, External Capital and Financial Transparency. Working paper, University of Miami.
[29]
Nobes, C. (2013). The continued survival of international differences under IFRS Accounting and Business Research, 43 (2), 83-111.
[30]
Nobes, C. W. & Zeff, S. A. (2008). Auditors' affirmations of compliance with IFRS around the World: An exploratory study. Accounting Perspectives, 7 (4), 279-292.
[31]
Noonan, L. (2016). Balance sheet doubts widen German lender’s credibility gap. Financial Times
[32]
Riedl, E. J., & Serafeim, G. (2011). Information risk and fair value: An examination of equity betas. Journal of Accounting Research, 49 (4), 1083-1122.
[33]
Ryan, S. G. (2008). Accounting in and for the subprime crisis. The Accounting Review, 83 (6), 1605-1638.
[34]
Song, C. J., Thomas, W. B. & Yi, H. (2010). Value relevance of FAS No. 157 fair value hierarchy information and the impact of corporate governance mechanisms. The Accounting Review, 85 (4), 1375-1410.
[35]
Zak, P. J., and Knack, S. (2001). Trust and growth. The Economic Journal, 111, 295-321.
Browse journals by subject