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Financial markets have developed formulas and models to derive fair values for bonds, futures, swaps, options and other securities. This model derives a fair value of an exchange rate, which might be used as a benchmark for a long-term equilibrium level to stabilize currency markets. The model is based on the value-added tax adjusted purchasing power parity exchange rate. This rate is then modified by five components: the macro-economic component, the foreign currency reserve component, the debt component, the interest rate component, and the political stability/leadership component. With respect to the American dollar, the model shows that the Euro and the Japanese Yen are overvalued compared to its current exchange rate, while the Brazilian Real, the Russian Ruble, the Chinese Yuan and the Australian dollar are currently undervalued.

The public controversies over the implementation of Statement of Financial Accounting Standard No. 157 (SFAS 157) and its impact on the recent financial crisis motivate us to examine the association between fair values and reporting lags. With a sample of U.S. banking institutions, we find that less verifiable fair value information is associated with longer earnings announcement lag and audit report lag. Longer earnings announcement lags resulting from less verifiable fair value information are due to the additional time of managerial estimations. Less verifiable fair values may also result in longer audit report lags due to the added training for auditors. Our study extends the current literature on fair values and reporting lags. Our findings contribute to the contemporary research on the timeliness of financial information disclosures which promotes the efficient functioning of the economy. Moreover, the findings of our study may be of interest to the global regulators, investors and other financial statement users.

We examine the impact of Level 3 assets held by nonfinancial companies on credit risk. Specifically, we investigate how the pricing uncertainty of Level 3 assets is reflected in credit ratings, corporate bond yield spreads, and incidences of bond covenants. We find that higher holdings of Level 3 assets are associated with lower credit ratings, higher yield spreads, especially for Level 3 assets sample, and incidences of bondholder-friendly covenants in the bond issues. Our findings are robust to the treatment of sample selection bias and the influence of macroeconomic factors. In addition, our direct test on the relation between the holdings of Level 3 assets and a firm’s distance-to-default shows that higher holdings of Level 3 assets reduce a firm’s distance-to-default. Overall, our findings support the view that Level 3 assets are perceived as increasing credit risk in the bond market.

Chilean publicly listed companies are required by law to pay out a minimum 30% of distributable earnings after taxes as dividends on common stock. The study extends Lintner’s [Lintner, J (1956). Distribution of incomes of corporations among dividend retained earnings and taxes. American Economic Review, 46, 97–113.] model of dividend smoothing and Banerjee [Banerjee, S, VA Gatchev and PA Spindt (2007). Stock market liquidity and firm dividend policy. Journal of Financial and Quantitative Analysis, 42(2), 369–398.] logistic model of the likelihood of a firm paying a dividend to investigate the signaling, liquidity, corporate governance, and information risk-based theories of dividends. The results show that Chilean firms’ excess dividends are smoothed in relation to the prior period level of excess dividends, and lagged earnings do not drive excess dividends even though the mandatory minimum dividend is defined in terms of lagged earnings. This insight establishes that dividend decisions regarding the size of the excess dividend and the likelihood of paying an excess dividend are distinct from the mandatory dividend payment. Additionally, the size of excess dividends and their likelihood are higher at firms with higher growth opportunities, a result consistent with the use of excess dividends as a signaling device. Results also demonstrate that greater transparency is associated with a greater likelihood of paying an excess dividend, but transparency does not drive policy regarding the size of the excess dividend. Moreover, the corporate governance mechanism creditor monitoring influences the size of excess dividends but not the likelihood of paying excess dividends. These results have implications for securities regulators evaluating the pros and cons of a mandatory dividend policy to protect minority shareholders in emerging markets.

We examine a potential informational cost of adopting the International Financial Reporting Standards (IFRS). Using a difference-in-differences approach, we find that mandatory IFRS adoption leads to a significant decrease in accrual reliability. We also find that this negative relation between IFRS adoption and accrual reliability is more pronounced for firms (a) holding more financial instruments and (b) domiciled in jurisdictions with weak institutional features. The above findings are robust to alternative sampling and an extended sample period. Further analysis shows that reduced accrual reliability reflects a trade-off with increased value relevance and that outside investors fail to understand the IFRS-induced reductions in accrual reliability.

Synopsis

The research problem

This study investigates whether the debt structure of a firm — that is, how a firm organizes its debt contracts — depends on the extent to which fair value measurement is applied to the balance sheet.

Motivation

Most public firms have a nontrivial percentage of balance sheet items measured at fair value under the mixed attribute accounting, and there is a lack of understanding of its effect on the reporting entity’s debt structure. This study focuses on two aspects of the debt structure that have both practical and theoretical relevance, namely the priority structure and the financial flexibility. A priority structure involves the simultaneous use of different priorities of debt and is common among risky borrowers. Survey results show that financial flexibility is of first-order importance regarding the debt policy of firms. Here, financial flexibility refers to a firm’s ability to pursue new investment opportunities via debt issuance.

The test hypotheses

The first hypothesis states that a borrower with a higher percentage of balance sheet items measured at fair value is less likely to have a priority structure. The second hypothesis states that a borrower with a higher portion of balance sheet items measured at fair value likely has a debt structure that is more financially flexible. The third hypothesis states that the fair value of liabilities and the fair value of assets are equally relevant to debt structure decisions.

Target population

This study focuses on nonfinancial firms in North America that are subject to the mixed attribute accounting, which measures a certain percentage of assets and liabilities at fair value.

Adopted methodology

The main tests use multivariate analysis that includes both logistic regressions and OLS regressions. Additional tests include cross-sectional analyses and the Granger causality test.

Analysis

Using a sample constructed from Compustat North America and Capital IQ (6,220 firms and 36,487 firm-year observations), the main tests regress dependent variables, namely the priority structure measures and financial flexibility, on the exposure to fair value measurement.

Findings

Results show that fair value measurement reduces information asymmetry and has favorable effects on the debt structure. A high exposure to fair value measurement reduces the need for a priority structure. A high exposure to fair value measurement also enhances financial flexibility. Additional analyses reveal that the favorable effect mainly comes from assets measured at fair value. The effect becomes weaker with respect to liabilities measured at fair value.