Differences in the reliability of fair value hierarchy measurements: A cross-country study

• Main Authors: LIM, Chu Yeong, PAN, Gary, OW YONG, Kevin
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2020
• Subjects: Fair Value Accounting; Institutional Factors; Reliability; Accounting; Corporate Finance; Portfolio and Security Analysis
• Online Access: https://ink.library.smu.edu.sg/soa_research/1880; https://ink.library.smu.edu.sg/context/soa_research/article/2908/viewcontent/10.11648.j.jfa.20200804.15_pvoa.pdf
• Institution: Singapore Management University

Prior research suggests there are significant differences in how investors perceive the reliability of fair values. An unaddressed question in this stream of research is whether cross-country differences in institutional factors can mediate differences in reliability for the fair value hierarchy measurements. We contribute to the research on fair value accounting by examining the impact of institutional factors toward the perceived reliability of fair value measurements in an international context. Based on an international sample of banks across twenty different countries, we find that the probability of crash risk is lower among countries with better financial development infrastructure, greater level of trust, tighter security regulations and higher level of disclosure requirements. These results apply to Level 1 assets but not to Level 2 and Level 3 assets. We also document that these cross-country factors improve the trading volume of our sample banks. Our study provides early evidence suggesting that fair value measurements across the fair value hierarchy are impacted by a country’s institutional background and financial development as well as the extent of its securities regulation and disclosure level. Our study suggests that there are ongoing concerns toward opaque fair values which are not fully eliminated by institutional differences. In addition, these differences matter in influencing investor willingness to trade in these stocks.