Corporate Governance, SFAS 157 and the Cost of Equity Capital

• In Event: Financial Accounting and Reporting 10

Abstract

This study examines the association between fair value measurements and the cost of equity capital, and assesses the impact of corporate governance on this relationship for U.S. financial firms. We find that firms’ cost of equity capital is negatively associated with more verifiable fair value assets (Levels 1 and 2) and positively related to less verifiable fair value assets (Level 3). Furthermore, the positive association between less verifiable fair value assets and the cost of equity capital is less prominent under better corporate governance. The differential impact between more and less verifiable assets becomes smaller for firms with stronger governance. Our findings contribute to the ongoing debate on fair value regulation by demonstrating the economic consequences of adopting SFAS No. 157 and the importance of audit committee financial expertise on fair value reporting. We also provide evidence on the importance of board independence, internal control strength, auditor industry specialists, and audit committee financial experts in fair value reporting.

Authors

• Hua-Wei Huang, National Cheng Kung University

• Mai Dao, University of Toledo

• James M Fornaro, SUNY College at Old Westbury