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The ongoing debate, which has intensified during the recent financial crisis, regarding merits of fair value (FV) and historical cost (HC) accounting arises from concerns about what is the most appropriate measurement for assets and liabilities. This thesis investigates the relative and incremental value relevance of financial assets and liabilities measured at FV and HC for a sample of financial institutions from 25 European countries over the period 2006–2010. Relative value relevance considers whether FV alone provides greater information content than HC alone (and vice-versa), and incremental value relevance considers whether FV and HC together provide more information content than either FV or HC alone. Also examined is whether the relative and incremental value relevance of FV and HC are different during the financial crisis period (2008–2009) compared to the non-crisis period (2006, 2007, and 2010) and whether they vary across different European countries. Using market value of equity as a dependent variable and adopting the balance sheet model utilised in prior value relevance literature, I find that, for the whole sample period, FV measures are not relatively more value relevant than HC measures, and vice-versa. However, the multivariate regression results show that FV and HC together provide incremental information content over either FV or HC alone. Also, the empirical analysis shows that FV measures are relatively more value relevant to investors than HC measures in the financial crisis period but not in the non-crisis period. On the other hand, FV and HC measures together are found to be incrementally value relevant in both the crisis and non-crisis periods. Lastly, I divide the sample into country groups based on legal system and enforcement, transparency, size of the banking sector, and type of accounting model. Findings indicate that FV and HC have incremental, but not relative, information content in countries with a common law system, weak legal enforcement, high level of transparency, larger banking sector, and British-American or mixed economy accounting models.

This thesis investigates whether U.S. banks’ assets and liabilities, reported using Fair Value Accounting (FVA) under SFAS 157 Fair Value Measurement, are associated with information asymmetry among equity investors during the 2008 Global Financial Crisis. Using bid-ask spread as a proxy for information asymmetry and controlling for bank size, profitability, default risk and capital adequacy, I find that bid-ask spread is positively and significantly associated with total fair value net assets and net assets measured using Level 1 inputs (unadjusted observable inputs in active markets), Level 2 inputs (other indirect observable inputs), and Level 3 inputs (unobservable inputs reflecting firm’s own assumptions and models), as specified in SFAS 157. On the other hand, the U.S. Securities and Exchange Commission (2008) has alleged that large loan loss provisions, determined based on managerial internal information and discretion, played a significant role in bank failures in the Global Financial Crisis. I, therefore, examine whether banks’ loan loss provisions, specifically Provisions for Loan Losses (PLL) appearing on the income statement and Allowance for Loan Losses (ALL) appearing on the balance sheet, are associated with information asymmetry. I find that both PLL and ALL are positively and significantly associated with bid-ask spread, with higher standardized coefficients than that of fair value net assets. As the economic condition kept worsening during the Global Financial Crisis, I also find that both fair value net assets and loan loss provisions are constantly and positively associated with information asymmetry across the four quarters of 2008. The results are robust using constant samples, analysing fair value assets and liabilities separately, using a sample of non-bank firms, and extending the dataset to the fiscal year 2009. In short, both fair value net assets and loan loss provisions are associated with information asymmetry among equity investors during the 2008 Global Financial Crisis, with loan loss provisions having the stronger of the two effects.