Preliminary communication

FAIR VALUE HIERARCHY AND EARNINGS VOLATILITY

Slavko Šodan orcid.org/0000-0002-5043-6801 ; University of Split, Faculty of Economics, Business and Tourism, Department of Accounting and Auditing

Abstract

International Financial Reporting Standard 13 establishes a fair value hierarchy that categorizes sources of information used to measure fair value into three levels. The aim of this paper is to investigate the relation between the use of Level 2 and Level 3 fair value inputs (i.e. mark-to-model) and earnings volatility. The main assumption is that Level 2 and Level 3 inputs are more subjective, contain more measurement errors and allow managers to use their earnings management practices more often in comparison to Level 1 inputs. This estimation error in the measurement of assets and liabilities can be a source of additional financial statement volatility. Accordingly, when assets and liabilities are volatile, so are earnings. Most prior studies were mainly focused on the impact of the fair value hierarchy on the earnings value relevance. However, there is a lack of reliable empirical evidence on fair value hierarchy effects on earnings volatility and this study tries to fill that void.

Keywords

Fair value; Earnings volatility; Fair value hierarchy; Level 3 inputs

Hrčak ID:

230538

URI

https://hrcak.srce.hr/230538

Publication date:

19.12.2019.

Article data in other languages: croatian

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