AbstractsBusiness Management & Administration

Fair values of securities and closed-end fund discounts

by Ahmad Hammami

Institution: McGill University
Department: Desautels Faculty of Management
Degree: PhD
Year: 2015
Keywords: Business Administration - Accounting
Record ID: 2057941
Full text PDF: http://digitool.library.mcgill.ca/thesisfile130451.pdf


This paper examines the link between the reliability of accounting information and discounts in closed-end funds (CEF). Prior research examining this phenomenon has uncovered factors that contribute to a portion of the discount, yet the full variance between net asset value and unit share price has not been accounted for. This paper examines a new contributing factor to discounts in CEF. I use the fair value (FV) level hierarchy disclosures required in Statement of Financial Accounting Standard No. 157 (FAS 157) as proxies for different degrees of accounting information reliability. The results indicate that varying reliability levels contribute differently to discounts in CEF, where less reliable information contributes more to discounts than more reliable information. This evidence helps narrow the gap on the still not fully explained phenomenon of CEF discounts.Next, I conduct a detailed examination of the investments categorized in each one of FAS 157's disclosure levels in an attempt to address concerns raised by researchers that FAS 157 categorizations are a hierarchy of securities' characteristics as opposed to a measure of reliability. This investigation also helps identify how discounts in CEF are affected by different types of securities. Each one of FAS 157's disclosure levels contains a diverse mixture of securities, signifying that a thorough examination of how these underlying securities affect discounts is necessary to properly understand the existence of discounts in CEF. The results show that dissimilar investment types have varying effects on discounts regardless of whether those investments where grouped in the same FAS 157 level (due to the use of similar valuation inputs) or not. This shows that solely testing the effects of the levels is a superficial examination and that it is best to explore the details within the levels to ensure the identification of the influential investment.Finally, in order to examine if auditors have an effect of decreasing fair valuations' contributions to discounts, I examine how auditing fair valuations affects discounts. Auditors have been shown by prior researchers to be able to reduce errors and managerial manipulation in financial statements. Since auditor specialization has been shown to provide better insight into firms' reporting processes which in their turn lead to higher quality audits, I also examine the effect that specialized auditors have in comparison to non-specialists. The results show that auditors are capable of decreasing fair valuation caused discounts at all three reporting levels. The results also show that specialized auditors allow for smaller discounts than non-specialized auditors in all three levels as well. This suggests that FV reporting could benefit from the additional technical expertise of specialists.This thesis examines accounting information's reliability as a potential factor to discounts in CEF. This adds a contribution to the literature on accounting information reliability by showing how reliable information (or the lack…