Fair value accounting: information or confusion for financial markets?

This paper examines whether and how fair value measurement and disclosure by US bank holding companies influences financial analysts\u2019 ability to forecast earnings. Fair value measurement relates to more dispersed forecasts. Measurement basis disclosure (levels 1, 2 and 3) enacted by SFAS 157 translates into more accurate forecasts but has neutral effects for banks with a sizable proportion of assets at fair value. Furthermore, level 2 measurement relates to enhanced forecast accuracy, while level 3 measurement relates to increased forecast dispersion. These contrasting results reflect analysts\u2019 underlying information environment, with level 2 measurement translating into higher quality private and public information and level 3 into reductions in the quality of private and public information. Results do not change after controlling for assets\u2019 underlying riskiness. Overall, it appears that analysts perceive that managers convey useful information through level 2 figures but act opportunistically in measuring level 3 fair value figures