Fair Value Accounting and Corporate Capital Structure: Evidence from SFAS 157 Disclosures

Abstract

This paper investigates whether the extent of assets and liabilities measured at fair values is positively related to a firm’s level of debt. I predict a positive association because fair value estimates produce less reliable accounting numbers and, thus, increase agency costs between managers and shareholders. Consistent with the hypothesis, the results demonstrate a positive relationship between the extent of fair value estimates and a firm’s level of debt. I further find that the impact of fair value estimates on a firm’s level of debt is mitigated by high-quality auditors. Collectively, the results suggest that fair value accounting has impact on corporate economic decisions beyond affecting financial reporting quality.