Abstract
The use of Fair Value in financial reporting has developed a current debate about the impact of an FVA-based reporting system on EQ. FVA leads to more current accounting information since it is a market-based measurement. Nevertheless, Fair Value is considered unreliable and often it is subject to managerial discretion, especially when markets are illiquid or distressed. High degree of subjectivity in estimation of Fair Value could allow management opportunities for the exercise of judgments and intentional bias which can decrease the quality of financial reporting. Management discretion can result in a higher EM and thus in a reduced amount of EQ. Managers engage in EM especially during periods of financial distress to mask the negative effects of the crisis (e.g., low profitability and bad financial performance).
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