Header

UZH-Logo

Maintenance Infos

Discretionary measurement of Level 3 fair values during the 2008 financial crisis


Meyer, Conrad; Fiechter, Peter (2012). Discretionary measurement of Level 3 fair values during the 2008 financial crisis. FAWPS 1, University of Zurich.

Abstract

The measurement of fair values, particularly in the absence of quoted prices in active markets, is complex and difficult to verify. This paper examines whether banks use fair value estimates based on unobservable inputs (i.e., Level 3) to manage earnings during the 2008 financial crisis. Using a sample of 291 U.S. bank holding companies, we find that banks use discretionary Level 3 gains or losses to smooth earnings. We benchmark our findings against loan loss provisions (LLP), but we do not find consistent evidence that banks use LLP to smooth earnings, mainly because better corporate governance mechanisms effectively reduce discretion. However, better corporate governance does not reduce measurement discretion in Level 3. This finding suggests that monitoring mechanisms prevent excessive discretion for loans—which are measured at amortized cost—but have yet to develop to prevent similar discretion for investments that are measured at fair value.

Abstract

The measurement of fair values, particularly in the absence of quoted prices in active markets, is complex and difficult to verify. This paper examines whether banks use fair value estimates based on unobservable inputs (i.e., Level 3) to manage earnings during the 2008 financial crisis. Using a sample of 291 U.S. bank holding companies, we find that banks use discretionary Level 3 gains or losses to smooth earnings. We benchmark our findings against loan loss provisions (LLP), but we do not find consistent evidence that banks use LLP to smooth earnings, mainly because better corporate governance mechanisms effectively reduce discretion. However, better corporate governance does not reduce measurement discretion in Level 3. This finding suggests that monitoring mechanisms prevent excessive discretion for loans—which are measured at amortized cost—but have yet to develop to prevent similar discretion for investments that are measured at fair value.

Statistics

Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Date:2012
Deposited On:11 Dec 2012 16:24
Last Modified:13 Aug 2017 14:26
Series Name:FAWPS
Other Identification Number:merlin-id:7456

Download

Full text not available from this repository.

TrendTerms

TrendTerms displays relevant terms of the abstract of this publication and related documents on a map. The terms and their relations were extracted from ZORA using word statistics. Their timelines are taken from ZORA as well. The bubble size of a term is proportional to the number of documents where the term occurs. Red, orange, yellow and green colors are used for terms that occur in the current document; red indicates high interlinkedness of a term with other terms, orange, yellow and green decreasing interlinkedness. Blue is used for terms that have a relation with the terms in this document, but occur in other documents.
You can navigate and zoom the map. Mouse-hovering a term displays its timeline, clicking it yields the associated documents.

Author Collaborations