The Relevance of the Fair Value Measurement Hierarchy : A Holistic Perspective

This paper provides a non-traditional review of recent research on the fair value (FV) measurement hierarchy. We begin with a meta-analysis that synthesizes the studies on the value relevance of the FV hierarchy. Overall, we find that the value relevance is lower for level 3 than for levels 1 and 2. We also find that the value relevance of the FV hierarchy has increased over time, particularly for levels 1 and 2: this could be related to a learning effect among key parties (e.g., auditors, managers) and to advancements in technology. As for the level 3 results, the fundamentals of the underlying assets, model risk, and difficulties in conveying the complexity of the measurement process may contribute to a value relevance gap. In addition, we discuss studies that examine other issues related to the FV hierarchy, such as the attributes of investment securities and markets, managerial discretion, information content, and auditing and enforcement. We then evaluate the conclusions reached in the academic literature by adding insights from interviews with auditors and financial reporting professionals from financial institutions. Learning about fair value accounting (FVA) has accumulated over time, bringing a formalization of the FV measurement and reporting process in practice that the academic literature has yet to fully recognize. This highlights conceptual and methodological issues in the existing literature as well as interesting areas for research with practical implications