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Differences in the Reliability of Fair Value Hierarchy Measurements: A Cross-Country Study

Received: 19 June 2020     Accepted: 16 July 2020     Published: 5 August 2020
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Abstract

Prior research suggests there are significant differences in how investors perceive the reliability of fair values. An unaddressed question in this stream of research is whether cross-country differences in institutional factors can mediate differences in reliability for the fair value hierarchy measurements. We contribute to the research on fair value accounting by examining the impact of institutional factors toward the perceived reliability of fair value measurements in an international context. Based on an international sample of banks across twenty different countries, we find that the probability of crash risk is lower among countries with better financial development infrastructure, greater level of trust, tighter security regulations and higher level of disclosure requirements. These results apply to Level 1 assets but not to Level 2 and Level 3 assets. We also document that these cross-country factors improve the trading volume of our sample banks. Our study provides early evidence suggesting that fair value measurements across the fair value hierarchy are impacted by a country’s institutional background and financial development as well as the extent of its securities regulation and disclosure level. Our study suggests that there are ongoing concerns toward opaque fair values which are not fully eliminated by institutional differences. In addition, these differences matter in influencing investor willingness to trade in these stocks.

Published in Journal of Finance and Accounting (Volume 8, Issue 4)
DOI 10.11648/j.jfa.20200804.15
Page(s) 199-207
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2020. Published by Science Publishing Group

Keywords

Fair Value Accounting, Institutional Factors, Reliability

References
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Cite This Article
  • APA Style

    Chu Yeong Lim, Gary Pan, Kevin Ow Yong. (2020). Differences in the Reliability of Fair Value Hierarchy Measurements: A Cross-Country Study. Journal of Finance and Accounting, 8(4), 199-207. https://doi.org/10.11648/j.jfa.20200804.15

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    ACS Style

    Chu Yeong Lim; Gary Pan; Kevin Ow Yong. Differences in the Reliability of Fair Value Hierarchy Measurements: A Cross-Country Study. J. Finance Account. 2020, 8(4), 199-207. doi: 10.11648/j.jfa.20200804.15

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    AMA Style

    Chu Yeong Lim, Gary Pan, Kevin Ow Yong. Differences in the Reliability of Fair Value Hierarchy Measurements: A Cross-Country Study. J Finance Account. 2020;8(4):199-207. doi: 10.11648/j.jfa.20200804.15

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  • @article{10.11648/j.jfa.20200804.15,
      author = {Chu Yeong Lim and Gary Pan and Kevin Ow Yong},
      title = {Differences in the Reliability of Fair Value Hierarchy Measurements: A Cross-Country Study},
      journal = {Journal of Finance and Accounting},
      volume = {8},
      number = {4},
      pages = {199-207},
      doi = {10.11648/j.jfa.20200804.15},
      url = {https://doi.org/10.11648/j.jfa.20200804.15},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20200804.15},
      abstract = {Prior research suggests there are significant differences in how investors perceive the reliability of fair values. An unaddressed question in this stream of research is whether cross-country differences in institutional factors can mediate differences in reliability for the fair value hierarchy measurements. We contribute to the research on fair value accounting by examining the impact of institutional factors toward the perceived reliability of fair value measurements in an international context. Based on an international sample of banks across twenty different countries, we find that the probability of crash risk is lower among countries with better financial development infrastructure, greater level of trust, tighter security regulations and higher level of disclosure requirements. These results apply to Level 1 assets but not to Level 2 and Level 3 assets. We also document that these cross-country factors improve the trading volume of our sample banks. Our study provides early evidence suggesting that fair value measurements across the fair value hierarchy are impacted by a country’s institutional background and financial development as well as the extent of its securities regulation and disclosure level. Our study suggests that there are ongoing concerns toward opaque fair values which are not fully eliminated by institutional differences. In addition, these differences matter in influencing investor willingness to trade in these stocks.},
     year = {2020}
    }
    

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    AU  - Chu Yeong Lim
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    T2  - Journal of Finance and Accounting
    JF  - Journal of Finance and Accounting
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    AB  - Prior research suggests there are significant differences in how investors perceive the reliability of fair values. An unaddressed question in this stream of research is whether cross-country differences in institutional factors can mediate differences in reliability for the fair value hierarchy measurements. We contribute to the research on fair value accounting by examining the impact of institutional factors toward the perceived reliability of fair value measurements in an international context. Based on an international sample of banks across twenty different countries, we find that the probability of crash risk is lower among countries with better financial development infrastructure, greater level of trust, tighter security regulations and higher level of disclosure requirements. These results apply to Level 1 assets but not to Level 2 and Level 3 assets. We also document that these cross-country factors improve the trading volume of our sample banks. Our study provides early evidence suggesting that fair value measurements across the fair value hierarchy are impacted by a country’s institutional background and financial development as well as the extent of its securities regulation and disclosure level. Our study suggests that there are ongoing concerns toward opaque fair values which are not fully eliminated by institutional differences. In addition, these differences matter in influencing investor willingness to trade in these stocks.
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Author Information
  • Nanyang Business School, Nanyang Technological University, Singapore

  • School of Accountancy, Singapore Management University, Singapore

  • Design and Specialized Business Cluster, Singapore Institute of Technology, Singapore

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