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Fair Value Accounting and the Cost of Debt: The Role of Auditor Expertise

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Title:Fair Value Accounting and the Cost of Debt: The Role of Auditor Expertise
Authors:Magnan, Michel
Wang, Haiping
Shi, Yaqi
Keywords:Fair Value Accounting
Fair Value Hierarchy
Cost of Debt
Auditor Industry Expertise
Auditor Fair Value Expertise
Date Issued:2021
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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