Fair Value Categorization under IFRS, Institutional Environment, and the Value Relevance of Fair Values
University of Neuchatel - Institute of Financial Analysis
Lancaster University - Management School
May 12, 2014
Most prior studies attribute valuation discounts on certain fair valued assets to measurement error and bias. We argue that international variation in institutional factors play a role in determining the value relevance of fair values beyond measurement. Specifically, the ability to process fair value information and the degree of behavioral bias are likely to vary with institutional factors like the country-level information environment and the level of market sophistication. We predict that institutional differences particularly affect the value relevance of optionally fair valued assets that have traditionally been measured at amortized cost. Using a global sample of IFRS banks and Financial Structure as an aggregate proxy for institutional differences, we find that assets designated at fair value through profit or loss (FVO) are less value relevant in bank-based economies. In contrast, assets held for trading (HFT) are value relevant regardless of the institutional environment. In additional tests, we show that our findings are not solely attributable to differences in fair value measurement. Finally, we find that high quality firm-level information environment improves the value relevance of the FVO in bank-based economies, pointing towards the explanation that the low country-level information environment limits investors’ ability to properly process certain fair value information.
Number of Pages in PDF File: 58
Keywords: Fair Value Accounting, International Financial Reporting Standards (IFRS), Value Relevance, Institutional Accounting, Information Environment
JEL Classification: G18, G21, M41, N20
Date posted: February 12, 2011 ; Last revised: May 13, 2014
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