The impact of fair value accounting on earnings quality

In this study, the impact of using fair value accounting by deposit banks on earnings quality is analyzed. Based on the research for 224 banks, the year observations consisting of 32 deposit banks in the 7 years period between 2013 and 2019, the explanations regarding the fair value and hierarchy in the independent audit reports were analyzed. The aim of this study is to examine the relationship between the use of fair value in different hierarchy levels and earnings persistence and earnings volatility, which are the main indicators of earnings quality. The main assumption of the study is that, the financial assets of deposit banks, which they valued with Level 1 inputs, increase the earnings persistence and decrease the earnings volatility. It is assumed that Level 2 and Level 3 inputs decrease the quality of earnings, since they are more subjective and allow measurement errors and earnings management practices. In addition, such factors as bank size, deposit ratio, equity ratio, loan ratio, debt to equity ratio and return on equity, which are considered to have an impact on earnings quality, other than using fair value accounting, are included in the analysis as control variables. The findings show that financial assets valued with Level 1 inputs increase the earnings quality, while financial assets valued with Level 2 inputs decrease the earnings quality. A statistically significant relationship was not found between financial assets valued with Level 3 inputs and earnings quality.