Fair value disclosures of level three assets and credit ratings

Using a large sample of U.S. firms, this study explores whether a firm's holdings of SFAS 157 level three fair value assets (level three assets) have an impact upon corporate credit ratings. The findings suggest higher holdings of level three assets negatively impact credit ratings. Both levels and changes analyses support this result. In additional cross-sectional analysis, this relation becomes stronger for firms with greater financial leverage, which suggests that a primary determinant of credit risk amplifies the documented main effect. Furthermore, higher magnitudes of level three assets are associated with an economically meaningful increase to corporate bond spreads.