Essays on fair value reporting.
详细信息
文摘
The three papers in this dissertation examine reporting of fair values by financial institutions. In the first paper I analyze Embedded Value EV) reporting by firms with life insurance operations to assess the impact of unregulated financial reporting on transparency and to examine the institutional characteristics that promote unregulated reporting. Under EV accounting the present value of future cash flows from in-force contracts is included in shareholders equity, and profit is calculated as the change in equity between two periods. In contrast to Generally Accepted Accounting Principles GAAP), this approach produces higher shareholders equity and recognizes income at contract inception. I find firms that adopt EV reporting exhibit a decline in information asymmetry and that this decline is larger as EV reporting evolves to address methodological deficiencies and to permit more comparability across firms. The decrease in information asymmetry is contingent on providing an audit certification and is larger for firms that commit to providing EV reports. Moreover, I document that EV reporting is more widespread in countries with higher hostile takeover activity, analysts that believe EV disclosure to complement rather than substitute their information, managers that do not avoid volatile income measures, and regulators that are less likely to intervene in the product market. In the second paper co-authored with Eddie Riedl), we examine whether information risk is reflected in equity betas for a large sample of U.S. banks, exploiting recent mandatory disclosures of financial instruments designated as fair value level 1, 2, and 3, which indicate progressively more illiquid and opaque financial instruments. Consistent with predictions, results reveal that portfolios of level 3 financial assets have higher implied betas relative to those designated as level 1 or level 2 assets. We also find that there is a monotonic increase in stock price synchronicity across fair value level 1, 2, and 3 portfolios. The results are consistent with a higher cost of capital for banks holding more opaque financial assets. Moreover, we find that fair value reporting decreases the information gap between financial instruments with differential transparency and liquidity, for firms with more informative disclosures. Therefore, we conclude that fair value reporting provides valuable information to market participants. Finally the third paper co-authored with Claudine Gartenberg) contributes to one of the central debates from the 2008 financial crisis: whether fair value accounting positively or negatively impacted firm valuation during this period. While fair valuation has not been cited as a cause of the crisis, it has been considered an exacerbating factor. We provide evidence inconsistent with this argument. Our research design relates the proportion of assets held at fair value to abnormal stock returns, focusing in particular on the 4 th quarter of 2008 following the Lehman Brothers bankruptcy, the Reserve Primary fund "breaking the buck" and other adverse events. Our central finding is that firms with higher percentage of assets fair valued experienced higher abnormal stock returns during this period. In addition, we show that fair valuation is widespread not only in financial firms but also in industrial firms and that our results hold for both financial and industrial firms. We do not find evidence that these results are driven by a specific subsample, the underlying quality of the assets, mean reversion in stock returns, anticipation of the crisis, or liquidity factors alone. To our knowledge, this is the first paper that directly tests the connection between equity performance and fair valuation using newly available disclosures resulting from SFAS 157.