The Effects of Recognized Level 3 Fair Value on Manager Selling Decisions

• In Event: Research Paper Session—Management Accounting

Abstract

This study examines the effects of the discretion allowed in fair value accounting on manager selling decisions of Level 3 fair value assets. In a 2x2 between-participants design, we manipulate the conservatism of the assumptions used in determining the fair value estimate (more or less conservative) and the volatility of the historically recognized fair value (low or high volatility). Accounting managers with fair value accounting experience made selling decisions regarding a pool of Level 3 fair value assets. The results indicate that conservatism in fair value estimation and volatility interact to affect the asking price. Further, the conservatism of the fair value estimate significantly impacts the lowest acceptable selling price and willingness to accept selling prices below the most recently recognized fair value. The results indicate that, even when managers are aware of the underlying assumptions, fair values can have unintended consequences on managerial decisions.

Authors

• Karen Green, University of Toledo

• Alisa Gabrielle Brink, Virginia Commonwealth University