Fair Value Measurements, Information Risk, Liquidity and Firm Value

Authors

  • Joseph Reid East Carolina University

Keywords:

fair value, liquidity, disclosure, valuation, financial reporting quality, information assimetry

Abstract

This study examines whether the implementation of FASB Accounting Standards Codification on Fair Value Measurements (ASC 820-10) impacts information asymmetry, liquidity, and firm value. ASC 820-10 was designed and implemented under the premise it would improve financial reporting quality and comparability of fair value measurements in financial reports by requiring firms to disclose activity within and between fair value measurement levels. Increased disclosure that reduces information asymmetry (risk) will increase financial statement readability and increase liquidity. If the disclosed information lacks precision, the value of the information is discounted and its effect on investor perception becomes ambiguous. This study examines 10-K and 10-Q filings of firms with level 2(3) fair value activity from 2007 through 2012. Initial results reveal ASC 820-10 did decrease liquidity for firms with material transfers furthermore some investors and analysts assign value to financial statement information based on relevancy and understandability. Taken together these results signal to standard setters the increased mandatory disclosures around the measurement of unobservable inputs (level 3 securities) are value relevant and economically significant. This study extends the literature on the relationship between fair value relevance, information asymmetry, and information precision and contributes to the debate on the efficacy of unobservable units in fair value measurements.

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Published

2021-12-26

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ABR Journal Articles