Has Discretion in the Reporting of Investment Fair Value Declined Over Time?

In this study, we investigate the trend in fair value discretion for investment securities over the period from 2004 to 2019. Changes in data transparency, availability of pricing sources, and enhanced oversight mechanisms suggest less discretion in the reporting of investment fair values over time. Using an insurance industry dataset that provides fair values of identical securities across all holders, we find that the fair value range, standard deviation, and difference from the consensus value exhibit declining trends over the sample period. The declining trends are stronger in settings where management has greater opportunity or incentive to record a biased estimate. While conventional arguments express concern that managers can easily manipulate fair value estimates, our findings highlight significant reductions in fair value discretion over time. Since the primary argument against the use of fair value accounting is the lack of verifiability, our collective evidence related to financial assets suggests that the validity of this concern may be lessening.