Relevance of Fair Value information to Investors’ Decisions: Experimental Evidence from Egypt

Abstract

Historical cost information is being criticized because it doesn’t provide timely or relevant information to firm stakeholders, in general and investors in particular. As investors are demanding more relevant information to take rational investment decisions, it is recommended to add fair value information to the financial statements to reduce the level of information asymmetry and increase the level of transparency. The objective of this study is to investigate the effect of adding fair value information to historical cost in the financial statements on investors’ willingness to invest, trading volume and stock valuation. Based on a sample of 44 MBA and postgraduate students in the Faculty of Commerce, Alexandria University, we found experimental evidence that adding fair value information (whether level 1 or level 3) will have a positive and significant effect on investors’ willingness to invest and trading volume. Additionally, adding fair value information (level 1) will have a positive and significant effect on investors’ stock valuation. Additional analyses showed that level 1 fair value information is more informative – in comparison to level 3 fair value information, and it has a positive effect on investors’ willingness to invest and stock valuation.

Keywords: Fair value, Historical cost, Investment decisions, Experiment, Egypt.

JEL Classification: M41