Do Investors Trust Fair Values of Mark-to-Model Financial Instruments?
Evidence from the European Banking Industry
- Side: 119-141
- DOI: https://doi.org/10.18261/issn.1504-3134-2016-02-02
- Publisert på Idunn: 2016-11-16
- Publisert: 2016-11-16
The purpose of the study is to analyze whether investors see fair values of mark-to-market financial instruments as more value relevant than fair values of mark-to-model financial instruments. A sample of 98 European publicly listed banks is used to conduct the empirical study. Data on the amount of fair value financial instruments held by the banks is collected from annual reports for fiscal year 2009. We utilize disclosures mandated by the IFRS 7 fair value hierarchy which requires companies to categorize fair value instruments into three levels based on the objectivity of the inputs used in the valuation models. Additional data needed for the regression model is collected from the Thomson Datastream and Thomson Worldscope databases. Results of the empirical study support our hypothesis, i.e. that fair values based on market data are perceived by financial markets as more value relevant than fair values based on valuation models that utilize subjective inputs.Keywords:: Fair value hierarchy, value relevance, financial instruments, IFRS 7.