Fair value measurement: Is the debate around level II and level III assets and liabilities relevant

Double Degree. A Work Project presented as part of the requirements for the Award of a Masters Degree in Finance from the NOVA- School of Business and Economics and a Masters Degree in Business Engineering from Louvain school of Management

In this Work Project, I evaluate the relevance of the debate around fair value’s Level II and Level III assets and liabilities. The literature outlines some qualitative shortcomings of this valuation technique. However, it seems important to understand how those assets and liabilities affect the balance sheet from a quantitative point of view. The data collected indicate that 10% of the balance sheets of Standard & Poor’s 500 companies is evaluated using fair value measurement. My analysis reveals that the market prices are positively associated with fair value. It shows they are highly and positively sensible to Level III assets, suggesting that shortcomings outlined in the literature concerning the poor reliance in those inputs are not translated in the market behavior. The market even reacts in the opposite way as it approves the use of Level III inputs.

NSBE - UNL