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Determinants of discretionary fair value measurements: the case of Level 3 assets in the banking sector
Author(s) -
Yao Daifei,
Percy Majella,
Stewart Jenny,
Hu Fang
Publication year - 2018
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12225
Subject(s) - valuation (finance) , discretion , earnings , accounting , sample (material) , incentive , business , fair value , value (mathematics) , economics , actuarial science , microeconomics , statistics , chemistry , chromatography , political science , law , mathematics
Abstract The objective of our research was to respond to the call of Barth and Taylor ([Barth, M., 2010]) for more research to examine the role of discretion in fair value estimates. Specifically, we investigate factors that explain banks’ accounting choices to use Level 3 valuation inputs from the fair value measurement hierarchy. Using hand‐collected data from a sample of international banks during 2009–2013, we find that incentives to use discretionary Level 3 valuation inputs, which can provide an opportunity to manage earnings, are associated with both firm‐level and country‐level determinants. Additional tests provide evidence that Level 3 ‘transfer‐in’ behaviour is related to changes in bank characteristics.