Level 3 Fair Value Disclosures and Crash Risk
Date Issued
2016
Date
2016
Author(s)
Sung, Yi-Ju
Abstract
In response to the harsh public criticism of the inadequate disclosures mandated by SFAS No. 157, Fair Value Measurements, the FASB issued ASU (Accounting Standards Updates) 2010-06, Improving Disclosures about Fair Value Measurements, and ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP (the Updates hereafter), in an effort to further increase the reporting transparency, especially for Level 3 measurements. Using annual reports of banking firms, I examine whether the increased fair value disclosures by the Updates can effectively decrease “crash risk”, defined as the frequency of extreme negative stock returns. In support of the hypothesis, I find that firms, especially for those with Level 3 estimates, experience a decrease in crash risk after the Updates. In the additional test, I find evidence that firms with high Level 3 transaction volume experience a decrease in crash risk after the amendment to disclosures of Level 3 activity by the Updates. This suggests that the enhanced disclosures about transactions of Level 3 measurements can effectively reduce stock price crashes. Moreover, I find evidence that managers operating in firms with strong corporate governance show a lower tendency to conceal bad news, leading to lower stock price crash risk. Therefore, the impact of the Updates on bad news hoarding, thus crash risk, is limited. Taken together, my results are consistent with increased transparency from the Updates reducing crash risk among U.S. banking firms.
Subjects
Fair value hierarchy
SFAS No.157
Crash risk
ASU No.2010-06
ASU No.2011-04
Type
thesis
File(s)![Thumbnail Image]()
Loading...
Name
ntu-105-R03722001-1.pdf
Size
23.32 KB
Format
Adobe PDF
Checksum
(MD5):cd694fe7b33fe1e478ef11a760e8f832