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Effect of corporate governance and enforcement on fair value accounting in Brazil

Fernando Galdi (Department of Accounting and Finance, Fucape Business School, Vitória, Brazil)
André De Moura (Department of Accounting, Finance and Control, Fundacao Getulio Vargas Escola de Administracao de Empresas de São Paulo, São Paulo, Brazil)
Felipe Damasceno (Department of Accounting and Finance, Fucape Business School, Vitória, Brazil)
Alexandre Andrade (BNDES, Rio de Janeiro, Brazil)

Meditari Accountancy Research

ISSN: 2049-372X

Article publication date: 30 July 2024

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Abstract

Purpose

This paper aims to investigate whether Brazilian firms that legally bond to stricter enforcement and commit to stringent corporate governance requirements experience increased value relevance of discretionary fair value measurements (Levels 2 and 3), and how different measurement levels are associated with firms’ systematic risk.

Design/methodology/approach

The Brazilian data’s distinctive feature helps in analyzing fair value’s relevance in an emerging market with heterogeneous enforcement regimes. Given the inherent self-selection in corporate governance levels and cross-listing decisions, the authors use a two-step generalized method of moments approach. Building upon Song et al.’s (2010) framework, the authors carefully address potential selection biases. Furthermore, the authors expand Riedl and Serafeim’s (2011) model, based on Ohlson’s (1995) model, to explore whether the negative correlation between Level 1 net assets (assets minus liabilities) and firms’ beta is more pronounced compared to Levels 2 or 3 net assets. Additionally, the authors investigate whether this relationship intensifies when firms align themselves with enhanced governance structures and stricter enforcement regimes.

Findings

Fair value measurements which require more judgment (Levels 2 and 3) are more value-relevant when a firm is legally bonded to higher enforcement and better corporate governance. Level 1 fair values of these firms’ net assets are associated with lower systematic risk, while Levels 2 and 3 fair values (high subjectivity valuation) are not.

Originality/value

The authors show that firms that bond to better corporate governance and stricter enforcement regimes mitigate the information risk involved in subjective fair-value measurements.

Keywords

Acknowledgements

Fernando Galdi wishes to thank funding from the National Council for Scientific and Technological Development (CNPq). André De Moura acknowledges support from FGV EAESP.

Citation

Galdi, F., De Moura, A., Damasceno, F. and Andrade, A. (2024), "Effect of corporate governance and enforcement on fair value accounting in Brazil", Meditari Accountancy Research, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/MEDAR-08-2023-2139

Publisher

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Emerald Publishing Limited

Copyright © 2024, Emerald Publishing Limited

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