Re-Exploring Fair Value Accounting and Value Relevance: An Examination of Underlying Securities

Abstract

Focusing on closed-end investment funds, this paper examines whether the value relevance attached to the fair value estimates is influenced by the type of investment being held. Our premise is that the fair values of different investment types rely on different valuation models and imply different underlying risks. Using hand-collected U.S. closed-end funds data from 2009 to 2011, our results show that the value relevance attached to fair value hierarchy levels’ assets (i.e., Level 1, Level 2 or Level 3) reflects both the source of market information for fair value estimates (i.e. market prices, market inputs and model-based) but also the underlying type of investment being valued (e.g., government bonds, equities, corporate bonds, etc.). Within the same fair value category, we show that different types of investments have their own distinct value relevance that is significantly different from that of other types of investments within the same category. Moreover, within the same type of investment, we also show that the value relevance varies across the three fair value category levels. Our results further show that auditing in general only significantly impacts the value relevance of equities in Level 1, Level 2 and Level 3 and corporate bonds in Level 3.