Comments on: Fair Value Quiz http://www.fasri.net/index.php/2009/09/fair-value-week-continued/ Just another WordPress weblog Mon, 06 Feb 2012 18:32:42 -0600 http://wordpress.org/?v=2.8.5 hourly 1 By: Bob Lipe http://www.fasri.net/index.php/2009/09/fair-value-week-continued/comment-page-1/#comment-3158 Bob Lipe Thu, 17 Sep 2009 18:14:01 +0000 http://fasri.net/?p=1253#comment-3158 One thing I am unsure about, the figure in the paper is described as showing the portion of FINANCIAL ASSETS that are fair valued versus at historical cost. However, other parts of the paper seem to refer to total assets. Can the authors clarify if Figure 2 only considers financial assets? Does the rest of the paper only consider financial assets, or are total assets used in constructing variables for the regressions? One thing I am unsure about, the figure in the paper is described as showing the portion of FINANCIAL ASSETS that are fair valued versus at historical cost. However, other parts of the paper seem to refer to total assets. Can the authors clarify if Figure 2 only considers financial assets? Does the rest of the paper only consider financial assets, or are total assets used in constructing variables for the regressions?

]]> By: George Serafeim http://www.fasri.net/index.php/2009/09/fair-value-week-continued/comment-page-1/#comment-3045 George Serafeim Sun, 13 Sep 2009 21:36:16 +0000 http://fasri.net/?p=1253#comment-3045 Rob, this is an interesting question. Here are a few examples: Genentech: $9.6 bn in fv assets out of $21.8 bn assets in 2008 10k, including $4.5 bn in money markets, treasuries, and $3 bn in debt securities available for sale, King Pharma: $1.2 bn in fv assets out of $4.5 bn total assets in 2008 10k, including $834m in money market funds, $2.4 bn in auction rate securities Broadcom: $1.9 bn in fv assets out of $4.4 bn total assets in 2008 10k, including $829 in money markets funds and treasuries, $703 in government agency obligations Qualcom: $15.7 bn in fv assets out of $25.7 bn total assets in Q2 09 10Q, including $3.4 bn in corporate bonds, $2.4 bn in non-investment grade debt securities, $2.1 bn in equities and equity mutual funds It appears that they invest heavily in financial instruments mostly as a way of deploying excess cash. Rob, this is an interesting question. Here are a few examples:

Genentech: $9.6 bn in fv assets out of $21.8 bn assets in 2008 10k, including $4.5 bn in money markets, treasuries, and $3 bn in debt securities available for sale,
King Pharma: $1.2 bn in fv assets out of $4.5 bn total assets in 2008 10k, including $834m in money market funds, $2.4 bn in auction rate securities
Broadcom: $1.9 bn in fv assets out of $4.4 bn total assets in 2008 10k, including $829 in money markets funds and treasuries, $703 in government agency obligations
Qualcom: $15.7 bn in fv assets out of $25.7 bn total assets in Q2 09 10Q, including $3.4 bn in corporate bonds, $2.4 bn in non-investment grade debt securities, $2.1 bn in equities and equity mutual funds

It appears that they invest heavily in financial instruments mostly as a way of deploying excess cash.

]]> By: Robert Bloomfield http://www.fasri.net/index.php/2009/09/fair-value-week-continued/comment-page-1/#comment-2985 Robert Bloomfield Thu, 10 Sep 2009 18:00:48 +0000 http://fasri.net/?p=1253#comment-2985 Thanks so much for the reply, and the additional table. I find myself a little perplexed by the presence of substantial level 2 assets at tech firms. Do you know what those are? Are these financial assets falling under FAS 157? Or are these intellectual properties (patents, etc.) that they view as being comparable to others with known transaction prices? Thanks so much for the reply, and the additional table. I find myself a little perplexed by the presence of substantial level 2 assets at tech firms. Do you know what those are? Are these financial assets falling under FAS 157? Or are these intellectual properties (patents, etc.) that they view as being comparable to others with known transaction prices?

]]> By: George Serafeim http://www.fasri.net/index.php/2009/09/fair-value-week-continued/comment-page-1/#comment-2956 George Serafeim Wed, 09 Sep 2009 17:50:45 +0000 http://fasri.net/?p=1253#comment-2956 Dear Rob, Many thanks for your comments on our paper. We have a couple of responses to your concerns. First, concerning the figure showing fair valuation by industry. You raised a good point that market-to-book ratios vary considerably across industries. However, this does not change the overall inference from the figure that shows that fair valuation is high in R&D intensive industries. We reproduced the same picture deflating all fair value numbers by market value of assets (total assets minus book value of equity plus market value of equity) at the end of the quarter. There are some differences but the main result remains the same. We have emailed you the new figure to post if you like. Second, you mentioned that one possibility why we get the positive relation between fair valuation and abnormal stock returns is that firms with fewer fair-valued assets experienced negative returns as they were forced to take 4Q 2008 impairments that were already recognized by their peers as downward FV remeasurements. If this is the case, then we should find a negative significant association between stock returns and fair value measures in earlier quarters. We attempted to address this concern by conducting a pooled analysis on the 2nd and 3rd quarter, in which we did not find evidence for this negative association. The results are reported in Table 7 Columns 3 and 6. Third, you raise an issue with earnings management, whether firms with high fair valuation are performing better because they managed their fair value estimates upward, drawing a rosier picture for investors. We believe that, if this was the case, then the positive relation between fair valuation and abnormal stock returns would be driven by level 3 fair values, since firms have almost no discretion in fair value level 1 measurements and limited in fair value level 2 measurements. However, we find that level 1 and level 2 measurements are significantly associated with stock returns, while we find no significant relation for level 3. The paper is still preliminary so any other thoughts would be of great help. Thanks, Claudine and George <a href="http://fasri.net/wp-content/uploads/2009/09/gs-marketval.jpg" rel="nofollow"><img class="aligncenter size-medium wp-image-1255" title="FV deflated by market value" src="http://fasri.net/wp-content/uploads/2009/09/gs-marketval.jpg" alt="FV deflated by market value" width="300" height="163" /></a> Dear Rob,
Many thanks for your comments on our paper. We have a couple of responses to your concerns.
First, concerning the figure showing fair valuation by industry. You raised a good point that market-to-book ratios vary considerably across industries. However, this does not change the overall inference from the figure that shows that fair valuation is high in R&D intensive industries. We reproduced the same picture deflating all fair value numbers by market value of assets (total assets minus book value of equity plus market value of equity) at the end of the quarter. There are some differences but the main result remains the same. We have emailed you the new figure to post if you like.
Second, you mentioned that one possibility why we get the positive relation between fair valuation and abnormal stock returns is that firms with fewer fair-valued assets experienced negative returns as they were forced to take 4Q 2008 impairments that were already recognized by their peers as downward FV remeasurements. If this is the case, then we should find a negative significant association between stock returns and fair value measures in earlier quarters. We attempted to address this concern by conducting a pooled analysis on the 2nd and 3rd quarter, in which we did not find evidence for this negative association. The results are reported in Table 7 Columns 3 and 6.
Third, you raise an issue with earnings management, whether firms with high fair valuation are performing better because they managed their fair value estimates upward, drawing a rosier picture for investors. We believe that, if this was the case, then the positive relation between fair valuation and abnormal stock returns would be driven by level 3 fair values, since firms have almost no discretion in fair value level 1 measurements and limited in fair value level 2 measurements. However, we find that level 1 and level 2 measurements are significantly associated with stock returns, while we find no significant relation for level 3.
The paper is still preliminary so any other thoughts would be of great help.
Thanks,
Claudine and George
FV deflated by market value

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