The effect of Statement of Financial Accounting Standards No. 157 Fair Value Measurements on analysts’ information environment

This study examines the effect of the adoption of Statement of Financial Accounting Standards No. 157 Fair Value Measurements (hereafter FAS 157) on analysts’ information environment. A major controversy surrounding FAS 157 disclosures is whether Level 3 measurements provide useful information to financial statement readers. We provide evidence suggesting that FAS 157 disclosures regarding Level 3 measurements are able to reduce uncertainty in analysts’ information environment. Our results reveal that the provision of such fair value disclosures is associated with reduced uncertainty regarding future earnings and lower forecast errors. We also find that unrealized gains and losses from fair value changes in Level 3 measurements are positively associated with firms’ future performance. Overall, our findings suggest that disclosures related to FAS 157 fair value measurements improve analysts’ information environment. Our findings thus contribute to the debate regarding the extent of fair value accounting in financial reporting.