Context Matters: The Role of Fair Value Footnote Narratives

Firms provide narrative disclosures in financial statement footnotes to reduce fair value measurement uncertainty. However, financial statement users frequently challenge the meaningfulness of these disclosures. Using a comprehensive sample of U.S. financial institutions, we examine whether fair value footnote narrative disclosures effectively communicate measurement-related information to investors. We find that narratives trigger significant market reactions and trading activity, with stronger effects for Level 2 and Level 3 fair values. These effects are absent when disclosures rely on standardized language or contain less measurementspecific content. Further analyses reveal that fair value narratives are associated with higher information asymmetry across investors and fundamental measurement uncertainty. However, trading activity and price discovery are concentrated in the immediate disclosure period, with no evidence of subsequent price reversals, suggesting investors engage in genuine information processing rather than experiencing sustained confusion. Our findings show that while fair value narratives create temporary information processing frictions, they ultimately contribute to, rather than impede, the resolution of measurement-related uncertainty. Our paper adds to the debate about footnote disclosure effectiveness and provides insights into standard setters’ efforts to enhance measurement transparency through narrative disclosures.