External Monitoring of Property Appraisal Estimates and Information Asymmetry

28 Pages Posted: 17 May 2002

See all articles by Karl A. Muller

Karl A. Muller

Pennsylvania State University - Department of Accounting

Eddie Riedl

Boston University - Questrom School of Business

Date Written: September 2001

Abstract

Finance theory proposes that firms' cost of capital increases when market makers set wider spreads due to perceived higher information asymmetry across traders. Using a sample of UK investment property firms and controlling for firms' non-random selection of external monitors, we find evidence that market makers perceive information asymmetry across traders to be lower for firms employing external appraisers versus those employing internal appraisers. This evidence is consistent with liquidity-motivated traders being unable to overcome such reliability differences using asset value information from sources other than accounting. We fail to find a similar difference for firms employing Big 6 versus non-Big 6 auditors. Our findings contribute to the debate over the recognition of fair value estimates for long-lived tangible assets by documenting that reliability differences attributable to differential monitoring by appraisers can affect information asymmetry, and therefore firms' cost of capital.

JEL Classification: D82, M41, M44, M49

Suggested Citation

Muller, Karl A. and Riedl, Edward J., External Monitoring of Property Appraisal Estimates and Information Asymmetry (September 2001). Available at SSRN: https://ssrn.com/abstract=310160 or http://dx.doi.org/10.2139/ssrn.310160

Karl A. Muller (Contact Author)

Pennsylvania State University - Department of Accounting ( email )

Smeal College of Business
384 Business Building
University Park, PA 16802-3306
United States
814-865-0202 (Phone)
814-863-8393 (Fax)

Edward J. Riedl

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States
617-353-2317 (Phone)

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