DOES MANAGERIAL OPPORTUNISM EXPLAIN THE DIFFERENTIAL PRICING OF LEVEL 3 FAIR VALUE ESTIMATES?

Dahlia M. Robinson · Thomas Joseph Smith · Adrian Valencia

13 citations0/0 files storedThe Journal of Financial Research

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Auditing, Earnings Management, Governance Accounting Theory and Financial Reporting Risk Management in Financial Firms

Abstract

Abstract Using hand‐collected Level 3 data, we find that banks near key capital ratios report higher unrealized gains in Level 3 assets, consistent with managers using Level 3 valuations to boost capital ratios. Additionally, we document an incremental pricing discount for Level 3 assets among these firms, suggesting that the pricing discount observed by prior research may not be entirely due to measurement error inherent in Level 3. Furthermore, we observe that this opportunistic behavior diminishes under the new Financial Accounting Standards Board disclosure regime, suggesting that the expanded disclosures may increase the value relevance and reliability of fair value measurements.

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References

2008Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches 1997Earnings management to avoid earnings decreases and losses 1999Earnings Management to Exceed Thresholds 1996The pricing of discretionary accruals 1999Bank loan loss provisions: a reexamination of capital management, earnings management and signaling effects 1999Market Rewards Associated with Patterns of Increasing Earnings 2002Earnings Management to Avoid Earnings Declines across Publicly and Privately Held Banks 1996A Market-Based Evaluation of Discretionary Accrual Models

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