The Value Relevance of Fair Value Financial Assets During and After the 2008 Financial Crisis: Evidence from the Banking Industry

Abstract

Statement of Financial Accounting Standard 157 defines a hierarchy of three levels for reporting the fair of financial assets. In this paper we examine value relevance of the three levels of fair value assets and of non-fair value assets during the financial crisis of 2008-2009 and compare the results to the value relevance during the normal economic period of 2012-2013. Using quarterly data from the banking industry we find that, first, although both fair value disclosure and non-fair value disclosure provide investors with decision-related information, the value relevance of fair value assets is slightly greater than value relevance of non-fair value assets, and this difference is larger during recession period. Second, the value relevance of Level 3 financial assets, which are computed using the greatest amount of management discretion, is lower than the value relevance of Level 1 and Level 2 financial assets, and lower than the value relevance of non-financial assets. This result is true in the recession period and the normal economic period. Finally, corporate governance appears to have a positive impact on bank stock prices, and fair value disclosure is more useful for firms with weak corporate governance.