The Determinants and Consequences of using Level 3 Fair Value Estimates
: the Case of the EU Financial Institutions

  • Khalid Ibrahim Ahmad Alodeh

    Student thesis: Doctoral Thesis


    Due to the conflict of interest between the principals and managers of firms, the latter may take advantage of the flexibility of the fair value hierarchy opportunistically. Detecting such manipulative practices requires identifying control, regulatory and institutional factors at both the firm and country levels. This study came in response to the calls of prior research to investigate the role of discretion in fair value measurements in greater depth. This study aims to examine the firm- and country-level factors that explain firms' choice to use Level 3 fair value estimates. Specifically, it investigates the impact of the board’s attributes and country- level factors on firms’ probability to use Level 3 fair value for the financial institutions in the European Union using 723 firm-year observations from 2014 to 2018. Furthermore, the study examines whether firms holding Level 3 fair-valued assets experienced any effect on their credit rating and audit fees from 2014 to 2018. This investigation is conducted utilising samples of 586 and 1,098 firm-year observations, respectively. The study also sheds light on the moderating effect of board attributes and country institutional factors on the relationship between the use of Level 3 estimates and a firm’s credit ratings and audit fees. In essence, this study provides a fresh international perspective by bridging the gap between prior research on the determinants and consequences of using Level 3 fair value estimates.
    In line with the study’s expectations, the findings demonstrated that board size and female representation on the board play a significant role in curbing firms’ proclivity to use Level 3 fair value estimates. Moreover, while the findings reveal that board independence has a positive impact on firms’ proclivity to use Level 3 fair value estimates, they indicate that CEO duality has no crucial impact on such use. At the country level, the degree of accounting enforcement has been found to have a negative effect on firms’ likelihood to use Level 3 fair value estimates. In contrast, the findings revealed that the origin of the legal system has no significant effect. The study also found that the proportion of Level 3 fair value estimates has a negative impact on a firm's credit ratings and a positive impact on audit fees. In addition, the findings revealed that board gender diversity and the degree of accounting enforcement weaken the negative impact of using Level 3 fair value on credit ratings, while board independence strengthens this effect. Furthermore, the study found that board size, independence and gender diversity increase the positive impact of using Level 3 estimates on audit fees, whereas CEO duality and the degree of accounting enforcement mitigate this positive effect.

    Keywords: Level 3 Fair Value, IFRS 13, IFRS 7, Board Attributes, Accounting Enforcement, Legal System, Credit Ratings, Audit Fees.
    Date of Award9 Aug 2023
    Original languageEnglish
    Awarding Institution
    • University of Portsmouth
    SupervisorAhmed Aboud Mohamed Aboud (Supervisor) & Khaled Hussainey (Supervisor)

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