Market Perceptions of the Informational and Convergence Effects of Fair Value Reporting for Tangible Assets: US and Cross-Country Evidence

• In Event: Fair Value Issues

Abstract

This paper examines equity market perceptions of fair value reporting for tangible assets. Specifically, we exploit events affecting potential US adoption of fair value reporting for investment property (i.e., real estate) assets, one of the largest asset classes in the world. We identify six sample events, including those increasing the likelihood of fair value reporting (e.g., issuance of the related exposure draft) and decreasing this likelihood (e.g., subsequent removal of this topic from the FASB agenda). If fair value were adopted, this would converge US standards, which require depreciated historical cost reporting for investment property assets, with IFRS, which require fair values be reported or mandatorily disclosed for these assets. Using a sample of US publicly-traded investment property firms with an aggregate market capitalization exceeding $800 billion, we first document a significantly positive market reaction for movement towards fair value reporting. Next, we confirm cross-sectional predictions that this reaction is increasing for firms with (i) greater commitment to high quality reporting, (ii) greater investor demand for fair values and convergence with international standards, (iii) less risk, and (iv) staler asset values. Overall, our results are consistent with the equity market anticipating net benefits from movement towards fair value reporting for this asset class, which are associated with an improved information environment and/or convergence with international standards.

Authors

• Edward Riedl, Boston University

• Lihong Liang, Syracuse University

• Jenelle Conaway, Boston University