Fair Valuations of Non-Traded Financial Assets: Evidence from the Mutual Fund Industry

41 Pages Posted: 4 Sep 2021

See all articles by Paul E. Fischer

Paul E. Fischer

University of Pennsylvania; University of Pennsylvania - Accounting Department

David Haushalter

Pennsylvania State University - Mary Jean and Frank P. Smeal College of Business Administration

Brian P. Miller

Indiana University - Kelley School of Business - Department of Accounting

Kevin Pisciotta

University of Kansas - School of Business

Date Written: September 2, 2021

Abstract

We exploit a growing trend of mutual funds investing in private companies to examine the practice of fair value accounting. This particular setting provides a unique opportunity to examine fair value accounting because multiple mutual funds are required to simultaneously report valuations of identical assets that are not publicly traded. We find that funds’ valuations of private companies are much sticker than that of publicly traded companies. In more than a third of the quarterly observations of private companies, valuations are unchanged from the prior quarter – compared to only 0.1% for publicly traded companies. In fact, for 16% of the observations of private companies, valuations are unchanged for at least a year after a fund’s initial investment. We empirically examine potential explanations for this stickiness. First, we provide some evidence that changes in the valuation of private companies are timed to improve funds’ performance rankings, but no evidence that the valuations associated with changes are biased to improve rankings. Second, consistent with funds managing reporting costs and risks associated with fair value accounting by recording changes only when there is a compelling case for doing so, we provide evidence that changes often follow large macroeconomic and firm specific events, and that change behavior is highly correlated across funds and fund families. Finally, we find that changes are more likely around large negative market fluctuations than large positive market fluctuations suggesting that funds perceive that reporting risks associated with fair value accounting are asymmetric in nature.

Keywords: Fair Value Accounting, Mutual Funds, Performance Chasing, Private Firms

JEL Classification: G23, G32

Suggested Citation

Fischer, Paul E. and Fischer, Paul E. and Haushalter, David and Miller, Brian P. and Pisciotta, Kevin, Fair Valuations of Non-Traded Financial Assets: Evidence from the Mutual Fund Industry (September 2, 2021). Available at SSRN: https://ssrn.com/abstract=3916506 or http://dx.doi.org/10.2139/ssrn.3916506

Paul E. Fischer

University of Pennsylvania ( email )

PA
United States
215 573 7533 (Phone)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

David Haushalter

Pennsylvania State University - Mary Jean and Frank P. Smeal College of Business Administration ( email )

University Park, PA 16802
United States
814-863-7969 (Phone)
814-865-3362 (Fax)

Brian P. Miller

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States
812-855-2606 (Phone)

Kevin Pisciotta (Contact Author)

University of Kansas - School of Business ( email )

Capital Federal Hall
1654 Naismith Dr
Lawrence, KS 66045
United States

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