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Fair Value Accounting and the Cost of Debt

This study examines the association between the use of fair value accounting and the cost of debt, as well as the impact of auditor industry expertise on this association. The sample comprises U.S. financial institutions’ data between 2007 and 2014. Results suggest that more extensive use of fair value accounting measurement in the financial statements is generally associated with a higher cost of debt, which supports the argument that fair value accounting is perceived to exhibit lower reliability. Findings further show that greater reliance on Level 2 and Level 3 fair value inputs is related with a higher cost of debt, indicating that the reliability issue is primarily driven by Level 2 and Level 3 estimates. In addition, we do not find that auditor industry expertise improves the decision usefulness of fair value accounting information. These results hold even after controlling for variables associated with a financial institution`s business model.
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