The Effect of Fair Value Accounting on the Performance Evaluation Role of Earnings

52 Pages Posted: 17 Oct 2019

See all articles by Mark L. DeFond

Mark L. DeFond

University of Southern California - Leventhal School of Accounting; European Corporate Governance Institute (ECGI)

Jinshuai Hu

Xiamen University - Institute for Financial and Accounting Studies

Mingyi Hung

Hong Kong University of Science & Technology (HKUST)

Siqi Li

Santa Clara University - Leavey School of Business

Date Written: October 8, 2019

Abstract

Contracting theory asserts that the income statement's primary role is to provide useful information for management performance evaluation. We study the effect of fair value accounting on this role by examining the change in earnings pay-performance sensitivity (PPS) following the 2005 worldwide adoption of IFRS. We find that while IFRS's non-fair-value provisions improve earnings PPS, its fair value provisions offset this improvement. Overall, we contribute to the literature on the contracting usefulness of fair value accounting by presenting evidence that fair value accounting impairs the usefulness of earnings in evaluating management performance.

Keywords: accounting earnings; executive compensation; fair value accounting; historical cost accounting; contracting; pay performance sensitivity

Suggested Citation

DeFond, Mark and Hu, Jinshuai and Hung, Mingyi and Li, Siqi, The Effect of Fair Value Accounting on the Performance Evaluation Role of Earnings (October 8, 2019). Available at SSRN: https://ssrn.com/abstract=3466021 or http://dx.doi.org/10.2139/ssrn.3466021

Mark DeFond

University of Southern California - Leventhal School of Accounting ( email )

Accounting Building, Room 206
Los Angeles, CA 90089-0441
United States
213-740-5016 (Phone)
213-747-2815 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Jinshuai Hu

Xiamen University - Institute for Financial and Accounting Studies ( email )

Xiamen, Fujian 361005
China

Mingyi Hung

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Siqi Li (Contact Author)

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA 95053
United States

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