Financial Instrument Fair Values and Nonfinancial Firms

Abstract

This study examines whether financial instrument fair values help explain the cross-sectional variation in nonfinancial firms' equity values. Regressions of equity values on recognized financial statement components and SFAS No. 107 fair value disclosures are estimated for a random sample of 1992 through 1995 nonfinancial firms. Full sample results indicate that for 1993 and 1995 liability fair values are associated with equity values, years in which fair and book value differences are substantial and in average loss positions. Further analysis reveals that in each year explanatory power is consistently lower for industries whose returns exhibit low covariation with observed interest rate changes. This latter finding is consistent with concerns that the value-relevance of nonfinancial firms' SFAS No. 107 financial instrument fair values is limited in the absence of consideration of nonfinancial instrument fair values.