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Fair Value Accounting and the Cost of Debt

Author

Listed:
  • Michel Magnan
  • Haiping Wang
  • Yaqi Shi(Sans nom)
Abstract
This study examines the association between the use of fair value accounting and the cost of debt, as well as the impact of auditor industry expertise on this association. The sample comprises U.S. financial institutions’ data between 2007 and 2014. Results suggest that more extensive use of fair value accounting measurement in the financial statements is generally associated with a higher cost of debt, which supports the argument that fair value accounting is perceived to exhibit lower reliability. Findings further show that greater reliance on Level 2 and Level 3 fair value inputs is related with a higher cost of debt, indicating that the reliability issue is primarily driven by Level 2 and Level 3 estimates. In addition, we do not find that auditor industry expertise improves the decision usefulness of fair value accounting information. These results hold even after controlling for variables associated with a financial institution`s business model. Cette étude examine la relation entre l’intensité de l’usage de la comptabilité à la juste valeur et le coût de financement par voie de dette. Nous évaluons également si l’engagement d’auditeurs dits experts influence cette relation. Notre échantillon comprend des émissions de titres de dette effectuées par des institutions financières américaines entre 2007 et 2014. Nos résultats indiquent que l’utilisation plus intensive de la comptabilité à la juste valeur comme base de mesure pour les états financiers est associée à des coûts de financement plus élevés. La fiabilité moins grande de la comptabilité à la juste valeur peut expliquer ce résultat. À cet égard, l’utilisation d’intrants de niveau 2 et de niveau 3 influence grandement le coût de financement par voie de dette. Contrairement à certains résultats antérieurs, nous n’observons pas que l’engagement d’auditeurs dits experts contribue à réduire l’effet de la comptabilité à la juste valeur sur le coût de financement. Ces résultats demeurent valides même après avoir contrôlé pour des variables captant le modèle d’affaires des institutions financières.

Suggested Citation

  • Michel Magnan & Haiping Wang & Yaqi Shi(Sans nom), 2016. "Fair Value Accounting and the Cost of Debt," CIRANO Working Papers 2016s-32, CIRANO.
    • Handle: RePEc:cir:cirwor:2016s-32
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    File URL: https://cirano.qc.ca/files/publications/2016s-32.pdf
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    2. Assaf Bar‐Hod & Ester Chen & Ilanit Gavious, 2021. "The economic consequences of fair value disclosures: a manifestation of the buried facts doctrine," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(S1), pages 1363-1413, April.

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