Daly and Skaife (2016) analyze a novel setting in which to assess the impact of fair value accounting on a firm's cost of debt. Specifically, the paper assesses an international sample of firms that produce biological assets (i.e., bearer assets, non-bearer assets, or both types of assets), and finds that firms that use fair value inputs to value these assets have a higher cost of debt than firms that use historical cost.
Delving further, the paper finds that this correlation is present only for those firms that have bearer assets, and that the correlation becomes insignificant for firms that produce non-bearer assets. A possible explanation for this outcome is that, because there are few active markets for bearer assets, these assets are often valued using discounted cash flows. The discounted cash flow method allows managers more discretion when valuing assets and creditors may be more apt to demand a higher...
