Does the Reliability of Fair Value Measurements Affect the Relation Between Fair Value Adjustments for Unrealized Gains and Losses and Stock Returns?

Abstract

We examine the association between stock returns and unrealized gains and losses for fair value assets. We expect investors to perceive unrealized gains and losses for firms with more subjective inputs to be less reliable and price them differently from unrealized gains and losses for firms with less subjective inputs. Additionally, we examine whether the recent global financial crisis affected investors' perceptions of fair value measurement reliability and the pricing of unrealized gains and losses. We find that investors price unrealized gains and losses differently for firms with more subjective fair value measurements and that the crisis affected this relationship.