Within and Cross-Country Differences in the Value Relevance of Fair Values

In order to achieve well-functioning capital markets, firms have to provide investors and other stakeholders with relevant and reliable information. Especially, for financial firms a large amount of assets and liabilities are measured at fair value in accordance with International Financial Reporting Standards (IFRS). The complexity and lack of liquid markets of certain financial instruments has made the valuation of such financial instruments complicated. Hence, fair value accounting for financial instruments leads to some subjective estimation of input data used in the valuation process. This subjectivity can be misused by managers for their own interest (i.e. opportunistic behaviour). However, opportunistic behaviour can be reduced with efficient and sophisticated internal and external control mechanisms. This dissertation investigates which control mechanisms that are suitable in monitoring managers related to fair value accounting of financial instruments in financial firms. In the first essay, the effect of corporate governance on the value relevance of fair values is analysed. The assumption is that stronger boards with an appropriate structure are more effective in monitoring managers. The results indicate that board independence and gender diversity have a positive effect on the information quality of fair value estimates. In addition, the results indicate that board size is negatively associated with the value relevance of fair value estimates. Thereby, firms with smaller, more independent, and more diverse boards disclose fair value estimates of the highest quality. The second essay examines whether the value relevance of fair values varies across investor protection environments. The premise is that the better the investor feels protected from the firm, the more likely the investor will trust in the manager’s ability to estimate reliable and relevant fair values. This essay finds evidence that the value relevance of fair values is positively associated with the investor protection environment of the firm’s home country. In countries with undeveloped investor protection traditions, investors do not trust managers when it comes to estimating the fair value of financial instruments. The third essay examines whether audit quality has an impact on the value relevance of fair values. It can be assumed that managerial opportunism is mitigated by independent high quality auditing. The results suggest that client importance affects the information quality of fair value estimates negatively and that non-audit services have a positive effect on the value relevance of fair values. Hence, the results imply that higher level of information quality of financial instruments can be achieved with independent audit of high quality