Articlegreen2011

Judging the Relevance of Fair Value for Financial Instruments

Lisa L. Koonce · Karen K. Nelson · Catherine M. Shakespeare

85 citations0/0 files storedThe Accounting Review

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Accounting Theory and Financial Reporting Financial Markets and Investment Strategies Auditing, Earnings Management, Governance

Abstract

ABSTRACT We conduct three experiments to test if investors' views about fair value are contingent on whether the financial instrument in question is an asset or liability, whether fair values produce gains or losses, and whether the item will or will not be sold/settled soon. We draw on counterfactual reasoning theory from psychology, which suggests that these factors are likely to influence whether investors consider fair value as providing information about forgone opportunities. The latter, in turn, is predicted to influence investors' fair value relevance judgments. Results are generally supportive of the notion that judgments about the relevance of fair value are contingent. Attempts to influence investors' fair value relevance judgments by providing them with information about forgone opportunities are met with mixed success. In particular, our results are sensitive to the type of information provided and indicate the difficulty of overcoming investors' (apparent) strong beliefs about fair value. Data Availability: Contact the authors.

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References

2002Experimental research in financial accounting 1997Counterfactual thinking.2008Financial Accounting Standards Board (FASB)2009The crisis of fair-value accounting: Making sense of the recent debate 1991Costs and benefits of judgment errors: Implications for debiasing.1994Fair Value Accounting: Evidence from Investment Securities and the Market Valuation of Banks.2017Evolution in Value Relevance of Accounting Information 1996Value-Relevance of Banks' Fair Value Disclosures under SFAS No. 107.

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