Voluntary Fair Value Disclosures Beyond SFAS 157’s Three-level Estimates

Firms may voluntarily provide disclosures regarding controls and processes in place to validate SFAS 157 fair value estimates (“reliability disclosures”) so as to provide more assurance regarding the use of these estimates. We examine whether the provision of these voluntary fair value disclosures is driven by management’s concerns over the reliability of the SFAS 157 estimates. We find that firms with greater Level 2 and Level 3 assets provide more reliability disclosures, consistent with managers providing these disclosures to alleviate investors’ concerns over the reliability of the more opaque fair value estimates. We also examine whether the provision of these reliability disclosures increases the credibility of firms’ reported fair value estimates. We find that more reliability disclosures are associated with greater market pricing of Level 3 estimates, lower information risk associated with Level 3 estimates, and greater analysts’ consensus toward Level 3 estimates. Overall, our results suggest that voluntary reliability disclosures that firms provide beyond SFAS 157’s three-level estimates help investors and analysts interpret the more opaque fair value estimates more precisely.

This seminar is organised by the Erasmus Accounting Research Group.