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The Impact of the Institutional Environment on the Value Relevance of Fair Values

49 Pages Posted: 12 Feb 2011 Last revised: 17 May 2017

Peter Fiechter

University of Neuchatel - Institute of Financial Analysis

Zoltán Novotny-Farkas

Lancaster University - Management School

Date Written: May 12, 2014

Abstract

Most prior studies attribute valuation discounts on certain fair valued assets to measurement error or bias. We argue that institutional differences across countries (e.g., information environment or market sophistication) affect investors’ ability to process and impound fair value information in their valuation. We predict that the impact of the institutional environment on the value relevance is particularly pronounced for reported fair values of assets designated at fair value through profit or loss (hereafter, “FVO assets”), for which investor experience is lowest and complexity is highest. Using a global sample of IFRS banks, we find that FVO assets are generally less value relevant than held-for-trading assets (HFT) and available-for-sale assets (AFS). By partitioning countries into market- and bank-based economies to proxy for institutional differences, we find that the valuation discount on FVO assets is more pronounced in bank-based economies. Additional tests suggest that this valuation discount is attenuated by a richer firm-level information environment and the presence of institutional investors with fair value experience. Robustness analyses show that our findings are not solely attributable to differences in fair value measurement, fair value quality, or asset type composition.

Keywords: Fair Value Accounting, International Financial Reporting Standards (IFRS), Value Relevance, Institutional Accounting, Information Environment

JEL Classification: G18, G21, M41, N20

Suggested Citation

Fiechter, Peter and Novotny-Farkas, Zoltán, The Impact of the Institutional Environment on the Value Relevance of Fair Values (May 12, 2014). Review of Accounting Studies, Vol. 22, No. 1, 2017. Available at SSRN: https://ssrn.com/abstract=1758683 or http://dx.doi.org/10.2139/ssrn.1758683

Peter Fiechter (Contact Author)

University of Neuchatel - Institute of Financial Analysis ( email )

Rue A.-L. Breguet 2
Neuchatel, CH-2000
Switzerland

Zoltán Novotny-Farkas

Lancaster University - Management School ( email )

Bailrigg
Lancaster, LA1 4YX
United Kingdom

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