fair value relevance

THE ACCOUNTING REVIEW
Vol. 86, No. 6
2011
pp. 2075–2098

American Accounting Association
DOI: 10.2308/accr-10134

Judging the Relevance of Fair Value for
Financial Instruments
Lisa Koonce
The University of Texas at Austin
Karen K. Nelson
Rice University
Catherine M. Shakespeare
University of Michigan
ABSTRACT: We conduct three experiments to test if investors’ views about fair value are contingent on whether the financial instrument in question is an asset or liability, whether fair values produce gains or losses, and whether the item will or will not be sold/ settled soon. We draw on counterfactual reasoning theory from psychology, which suggests that these factors are likely to influence whether investors consider fair value as providing information about forgone opportunities. The latter, in turn, is predicted to influence investors’ fair value relevance judgments. Results are generally supportive of the notion that judgments about the relevance of fair value are contingent. Attempts to influence investors’ fair value relevance judgments by providing them with information about forgone opportunities are met with mixed success. In particular, our results are sensitive to the type of information provided and indicate the difficulty of overcoming investors’ (apparent) strong beliefs about fair value.
Keywords: fair value; relevance; forgone opportunities; counterfactual reasoning.
Data Availability: Contact the authors.

I. INTRODUCTION

F

or some time, a debate has existed on the relevance of fair value for the valuation of financial instruments. Proponents argue that financial statement measures based on prices that reflect the current market assessment—and thus lead to fair value gains and losses—inform investors about forgone opportunities arising from management’s decision to continue to hold assets or owe liabilities. These forgone opportunities are viewed as pertinent, as they allow management’s previous decisions to be

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