An Analysis of Recent Events on the Perceived Reliability of Fair Value Measures in the Banking Industry

Abstract

I use market-based measures to investigate the perceived reliability of fair value amounts reported in bank financial statements. Fair values as a measurement basis in accounting are becoming more predominant. This growth increasingly requires fair value estimation. I develop a hypothesis based on two sets of recent events that may affect investors' perception of reliability of fair value estimates differently. I empirically investigate whether 1) the impact of accounting-based frauds, or 2) the application of SAS 101, Auditing Fair Value Measurements and Disclosures and passage of the Sarbanes-Oxley Act prevail in terms of investors' perception of reliability. While I find an over-time increase, I document a downward shift in market-based reliability of bank fair value measures in the period 2003 to 2005 compared to the period 1995 to 2001, consistent with recent accounting-based frauds dominating that of regulatory efforts. These results highlight the importance of external events on perceived reliability.