This study investigates the association between accounting restatements and reporting different levels of fair value measurements as defined by SFAS No. 157. We find that firms with higher ratios of Level 3 fair value assets (i.e., financial assets which fair values are determined by unobservable, firm-generated inputs) to total assets are more likely to subsequently restate their financial statements. Further analysis shows that this association is driven by the restatements caused by errors and managerial manipulation. Overall, our results suggest that use of less reliable (Level 3) fair value measurements may reduce financial reporting quality.
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