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Mark-to-Market Accounting and Valuation: Evidence from UK Real Estate and Investment Companies

35 Pages Posted: 30 May 2003  

Jo Danbolt

University of Edinburgh Business School

Bill Rees

The University of Edinburgh Business School

Abstract

The accounting for British investment vehicles is idiosyncratic, but requires that investment assets are marked to market. This allows us to study valuation relevance of accounting according to industry specific GAAP for real estate and investment companies, which is not historic cost, and estimates for historic cost and mark-to-market accounting. We find that the revaluation of investment assets from cost to market is highly significant in both industries - in contrast to earlier US evidence. For both industries, the valuation impact of earnings, however measured, is low in comparison to that found in earlier studies of non-financial firms. This is as expected, given that profits earned in efficient capital markets are likely to be transient. Of the three earnings measures, the GAAP version, which includes the lowest proportion of transient investment returns, shows the largest coefficient estimates. More important is the apparent over-valuation of investment assets in the companies' accounts. We find both the real estate and investment companies to typically trade at substantial discount to their mark-to-market asset values. Our approach to investigating this puzzle is relatively novel, but although we can explain part of the real estate discount, our evidence does not help to explain the discount on investment trusts.

Keywords: Valuation Models, Financial Institutions, Fair Value Accounting

JEL Classification: M41, M44, G12, G20

Suggested Citation

Danbolt, Jo and Rees, Bill, Mark-to-Market Accounting and Valuation: Evidence from UK Real Estate and Investment Companies. EFA 2003 Annual Conference Paper No. 120; EFMA 2003 Helsinki Meetings. Available at SSRN: https://ssrn.com/abstract=393460 or http://dx.doi.org/10.2139/ssrn.393460

Jo Danbolt (Contact Author)

University of Edinburgh Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
UNITED KINGDOM

William Rees

The University of Edinburgh Business School ( email )

29 Buccleuch Place
Edinburgh, EH8 9JS
United Kingdom
+44 131 651 5244 (Phone)

HOME PAGE: http://www.business-school.ed.ac.uk

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