This study examines the economic implications of fair value liability gains and losses arising from the adoption of Statement of Financial Accounting Standards No. 159 (hereafter FAS 159). We find a positive correspondence between a firm`s FAS 159 fair value liability gains and losses and stock returns. Further analysis indicates that fair value gains and losses from liabilities attributable to the change in a firm`s own credit risk, which are considered counter-intuitive by critics of fair value accounting for liabilities, are also positively related to returns. We also document that the volatility of earnings that incorporate FAS 159 liability fair value gains and losses is positively associated with market measures of firm risk. Our study contributes to the controversy over recognition of liability fair value gains and losses by providing direct empirical evidence that such gains and losses are value and risk relevant.