Dr. Stanislava (Stas) Nikolova, associate professor of finance, earned her Ph.D. from the University of Florida. Before joining Nebraska in 2013, she served as senior financial economist at the U.S. Securities and Exchange Commission and a faculty member at George Mason University. Her research, which focuses on fixed-income securities and the regulation of the financial sector, has been published in the Journal of Financial Economics, Journal of Accounting and Economics, Review of Financial Studies
and Journal of Financial and Quantitative Analysis
Her recent work sheds light on how managers use their discretion when estimating fair values (FV) for financial reporting. Since the true FV of an asset is often unobservable, managers estimate it from various inputs: market prices (Level 1), observable inputs with adjustment (Level 2) or unobservable inputs (Level 3). They can also estimate FVs in-house or source them from a third party. By comparing FV estimates, levels and sources across insurers, Nikolova and her co-authors reveal holders of the same security in the same year report different FVs often, particularly at Level 3, and disagree on the level 60 percent of the time. Furthermore, levels and sources relate to FV inflation. Regardless of reported level, FV is higher when self-estimated. Insurers with incentives to appear financially healthy choose to self-estimate, resulting in greater aggregate portfolio FV inflation.
“Although reliance on FVs has increased in the last decade, aggregate data has hindered research on how firms arrive at reported FVs. We overcame this limitation by focusing on insurers’ individual asset level disclosures. Our research provides insight to standard setters responsible for issuing FV guidance and regulators tasked with monitoring firms’ compliance. It suggests more granular reporting may improve the accuracy of financial disclosures but it may still be insufficient to eliminate opportunistic reporting,” Nikolova explained.