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Fair Value Accounting and the Cost of Debt: The Role of Auditor Expertise
|Title:||Fair Value Accounting and the Cost of Debt: The Role of Auditor Expertise|
|Keywords:||Fair Value Accounting|
Fair Value Hierarchy
Cost of Debt
Auditor Industry Expertise
Auditor Fair Value Expertise
|Abstract:||This study examines the association between the use of fair value accounting and the cost of debt, as well as the impact of auditor national-level and city-level industry expertise on this association. Results suggest that more extensive use of fair value accounting measurement in the financial statements is generally associated with a higher cost of debt, primarily driven by Level 2 and Level 3 estimates, which supports the argument that fair value accounting is perceived to exhibit lower reliability. In addition, we find that national-level auditor industry expertise improves the informativeness of Level 1 and Level 3 fair value accounting information to debtholders, whereas city-level auditor industry expertise enhances the information quality of Level 3 fair value estimates to debtholders. Furthermore, we explore the effect of auditor task-specific fair value expertise and find that city-level auditor fair value expertise lowers the cost of debt for firms that use Level 3 fair value measurement. These results hold after correcting for self-selection bias, as well as controlling for the orthogonalized credit ratings and variables associated with firms’ underlying risks.|
|Appears in Collections:||
15 Financial Accounting 9: Fair value accounting/ Intangible assets/innovations (FAR9)|
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