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Strategic estimation of asset fair values

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  • Hanley, Kathleen W.
  • Jagolinzer, Alan D.
  • Nikolova, Stanislava

Abstract

We examine whether fair value (FV) input levels and estimation sources are related to FV inflation, the difference between an insurer's FV estimate and the consensus FV estimate across the security's holders. FV inflation is higher, and self-estimation more likely, when insurers report using Level 3 inputs when the consensus level is 2. Regardless of the level, FV is greater when self-estimated. Public insurers that inflate FV through self-estimation potentially obfuscate detection by reporting the use of Level 2 inputs. Insurers with stronger incentives to appear financially healthy choose to self-estimate, resulting in greater aggregate portfolio FV inflation.

Suggested Citation

  • Hanley, Kathleen W. & Jagolinzer, Alan D. & Nikolova, Stanislava, 2018. "Strategic estimation of asset fair values," Journal of Accounting and Economics, Elsevier, vol. 66(1), pages 25-45.
    • Handle: RePEc:eee:jaecon:v:66:y:2018:i:1:p:25-45
    DOI: 10.1016/j.jacceco.2018.01.004
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    2. Mahieux, Lucas, 2024. "Fair value accounting, illiquid assets, and financial stability," Other publications TiSEM 5dd826be-1379-4456-a9c2-e, Tilburg University, School of Economics and Management.
    3. Kalin S. Kolev, 2019. "Do Investors Perceive Marking-to-Model as Marking-to-Myth? Early Evidence from FAS 157 Disclosure," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 9(02), pages 1-47, June.
    4. Loumioti, Maria & Vasvari, Florin P., 2019. "Portfolio performance manipulation in collateralized loan obligations," Journal of Accounting and Economics, Elsevier, vol. 67(2), pages 438-462.
    5. Bischof, Jannis & Haselmann, Rainer & Kohl, Frederik & Schlueter, Oliver, 2022. "Limitations of implementing an expected credit loss model," LawFin Working Paper Series 48, Goethe University, Center for Advanced Studies on the Foundations of Law and Finance (LawFin).
    6. Bischof, Jannis & Laux, Christian & Leuz, Christian, 2021. "Accounting for financial stability: Bank disclosure and loss recognition in the financial crisis," Journal of Financial Economics, Elsevier, vol. 141(3), pages 1188-1217.
    7. Bischof, Jannis & Haselmann, Rainer & Tröger, Tobias, 2022. "Monitoring complex financial instruments in banks' balance sheets," SAFE White Paper Series 91, Leibniz Institute for Financial Research SAFE.
    8. Koo, Minjae & Muslu, Volkan, 2023. "Fund Flows and Asset Valuations of Bond Mutual Funds: Effect of Side-by-Side Management," Journal of Banking & Finance, Elsevier, vol. 154(C).
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    More about this item

    Keywords

    Fair value; Level 1; Level 2; Level 3; SFAS 157; Insurance companies; Regulatory capital; Asset values; Estimation bias;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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