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Strategic Estimation of Asset Fair Values

Journal(s): Journal of Accounting and Economics
Published: August 1, 2018
Author(s): Kathleen W. Hanley, Alan D. Jagolinzer, Stanislava Nikolovac

General Description
When estimating the fair value, the unbiased estimate of the potential market price, some managers may inflate these numbers when self-estimated due to the unobservable nature of the value. Insurers who need to appear financially healthy often choose to self-estimate their fair value, which research suggests, may need regulation that is more detailed.
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Abstract
We examine whether fair value (FV) input levels and estimation sources are related to FV inflation, the difference between an insurer's FV estimate and the consensus FV estimate across the security's holders. FV inflation is higher, and self-estimation more likely, when insurers report using Level 3 inputs when the consensus level is 2. Regardless of the level, FV is greater when self-estimated. Public insurers that inflate FV through self-estimation potentially obfuscate detection by reporting the use of Level 2 inputs. Insurers with stronger incentives to appear financially healthy choose to self-estimate, resulting in greater aggregate portfolio FV inflation.

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