When are Fair Value Estimates Comparable? Evidence from the SFAS No. 157 Fair Value Hierarchy

• In Event: Research in Financial Accounting II

Abstract

One motivation for expanding fair value accounting is to improve financial statement comparability by matching the timing of valuation across firms. However, the comparability of fair value estimates relies on consistent and verifiable measurement. We investigate whether verifiability and discretion over measurement affects the comparability of fair value estimates across firms. Our analysis exploits the increasing discretion and decreasing verifiability of estimates across the SFAS 157 hierarchy of fair value assets. We find that differences in exposure to Level 2 and Level 3 measurement impair the comparability of fair value estimates, with differences in Level 3 affecting comparability the most. Cross-sectional analyses provide evidence that Level 2 and 3 asset differences impair comparability more in subsamples where the firm-pairs have the incentive and/or ability to introduce discretion. Taken together, these results suggest that measurement and managerial discretion play a critical role in comparability for fair value accounting.

Authors

• Jonathan Black, Purdue University

• Zeyun (Jeff) Chen, Texas Christian University

• Marc Cussatt, Washington State University