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Value Relevance of Fair Values—Empirical Evidence of the Impact of Market Volatility

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  • Xiaofei Song

Abstract

This study examines empirically the effects of market volatility on the value relevance of fair values. Using the modified Ohlson model () and a sample of U.S. financial companies for the period of 2008 to 2013, this study shows that fair values are priced at a significant discount when market volatility is high. Song () shows analytically that the effectiveness of fair value accounting is negatively affected by market volatility. Findings of the current study suggest that investors understand the effects of market volatility on fair values and price them accordingly. The study extends the research on the determinants of the usefulness of fair values by looking beyond factors associated with the reliability of estimated fair values (Level 2 and Level 3 fair values). This study has practical implications: current accounting standards for fair value measurement acknowledge the limitations of the market as a source of fair values by offering a three‐level fair value hierarchy with provisions for fair values to deviate from market prices. Findings of this study shed light on a previously little studied factor, that is, market volatility, on the usefulness of fair values. Résumé L'auteure se livre à une étude empirique des répercussions de la volatilité du marché sur la valeur informative (pertinence pour l'évaluation) des justes valeurs. À l'aide d'une variante du modèle d'Ohlson (1995) et d'un échantillon de sociétés financières des États‐Unis pour la période s'échelonnant de 2008 à 2013, elle établit que les justes valeurs enregistrent une importante décote lorsque la volatilité du marché est élevée. Dans une étude analytique, Song (2013) démontre que la volatilité du marché a des répercussions négatives sur l'efficacité de la comptabilité à la juste valeur. Les constatations de l'auteure dans la présente étude semblent indiquer que les investisseurs saisissent les répercussions de la volatilité du marché sur les justes valeurs et fixent ces valeurs en conséquence. L'auteure étend la recherche aux déterminants de l'utilité des justes valeurs en poussant l'intérêt au‐delà des facteurs associés à la fiabilité des justes valeurs estimatives (justes valeurs de niveaux 2 et 3). Les résultats de l'étude ont des conséquences d'ordre pratique : les normes comptables actuelles en ce qui a trait à l'évaluation de la juste valeur reconnaissent les limites du marché comme source de justes valeurs en proposant une hiérarchie des justes valeurs à trois niveaux prévoyant la possibilité que les justes valeurs s'écartent des prix du marché. Les résultats de l'étude nous éclairent sur l'incidence de la volatilité du marché — un facteur peu étudié jusque‐là — sur l'utilité des justes valeurs.

Suggested Citation

  • Xiaofei Song, 2015. "Value Relevance of Fair Values—Empirical Evidence of the Impact of Market Volatility," Accounting Perspectives, John Wiley & Sons, vol. 14(2), pages 91-116, June.
    • Handle: RePEc:wly:accper:v:14:y:2015:i:2:p:91-116
    DOI: 10.1111/1911-3838.12045
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