The Value-Relevance of Fair Value Information
|School||Dongbei University of Finance|
|Keywords||Fair Value Value-relevance New accounting standard Market reaction|
This thesis takes the opportunity of issuance and implementation of new Accounting Standard for Enterprises in China, chooses the aspect of listed companies’usage of fair value, analyzes the main concepts and definitions, reviews the previous related literature references, selects the annual reports of listed companies in 2007 and 2008 as sample, analyzes the current status of fair value usage, the value relevance of fair value, the capital market’s reaction on fair value information, the functional fixation in capital market, and the earning management on fair value of listed companies.The analysis of listed companies’usage of fair value in 2007 and 2008 shows most listed companies have the capacity of using fair value and can use fair value correctly. Besides, the scope and the quality of using fair value did not shrink during the financial crisis in 2008; most companies obey the accounting standards’regulation and have better disclosure on specific accounting standards. However, challenges and problems still exit, Chinese listed companies need to improve the full disclosure of related information and the professional ability of accounting staff.The analysis of the value relevance of fair value information indicates that fair value information in annual reports of 2007 and 2008 has certain value relevance in Chinese listed companies. The two models selected in this thesis are pricing model and returns model. These two models both have strong explanation using the sample of listed companies, and the regression results show the value relevance of fair value information. In pricing model, the net financial assets which are measured at their fair values and the variation of which is recorded into the profits and losses of the current period per share and the net assets which are not measured at their fair values and the variation of which is recorded into the profits and losses of the current period per share have significant explanation power, in returns model, incremental earnings per share of profits and losses on the changes in fair value has significant explanation power for financial listed companies, for non-financial samples, all the fair value related variables are significant. Not all the variables in the models have strong explanation power, nevertheless, Chinese listed companies’fair value information has value relevance still can be approved by this thesis. The analysis on the market reaction to China Securities Regulatory Commission’s disclosures of fair value related regulations or documentations and listed companies fair value information finds that investors in Chinese capital market can understand the direct and easier regulations or documentations more profoundly, then react positively; investors in Shang Hai Stock Exchange and Shen Zhen Stock Exchange have similar reactions, while Hong Kong investors’reaction is relatively weak; fair value information can explain capital markets’reaction to some extent through the regression on CAR, and the holding gain and loss of financial assets available for sale per share, incremental earnings per share of profits and losses on the changes in fair value and incremental earnings per share of other profits and losses have explanation power.The analysis on whether Chinese capital market have "functional fixation" on fair value information comes into the conclusion that Chinese investors can not comprehend fair value information thoroughly, they only focus on the total revenue and net income, and ignore the profits or losses of fair value do not have the feature of continuance; as regard to fair value information, Chinese capital market do have "functional fixation".The analysis on earning management of profits or losses of fair value shows listed companies do have earning management on their profit, especially when the rate of profit near zero, and very little companies have negative net income in 2007 and 2008, and companies have earning management on discretional accruals, but there is not evidence of earning management on profits or losses of fair value.This thesis combines different parts with the main theme that the usage of fair value in Chinese listed companies, and consists of eight chapters as follows:Chapter 1 is the introduction. It introduces the background and motivation of this research, the research route, main methods, the positive explorations and the limitations.Chapter 2 is the definition of concepts and references review. It reviews the concept of fair value date back to its origination, and has a retrospect of the explanation of the definitions by scholars, the accounting standards designers and governments. It also reviews the relevant references both in China and abroad, and analyzes the perspectives, objects, methods and conclusions of these references.Chapter 3 is the analysis on the usage development of fair value in China. It accounts for the first introduce fair value into accounting standards in 1998, the usage of fair value was quitted, the new accounting standards’fully input fair value in 2006, the listed companies’usage of fair value from 2007 and the influence and outcome of income etc. on listed companies’financial reports. At the same time, this part analyzes the usage of related detail standards by Chinese listed companies.Chapter 4 is the empirical research on value relevance of fair value. It improves the models of Ohlson (1995), Barth (1994) and Deng Chuanzhou (2005),analyzes whether the fair value related information has incremental explanatory power on accounting information (eg. Stock price, return) of Chinese listed companies in 2007 and 2008.Chapter 5 is the analysis on market reaction on fair value information. It observes the market reaction on the related regulations by China Securities Regulatory Commission, and the fair value information disclosed by listed companies. In this part, the method of event study is used, markets indices changes are observed, and regression model on CAR is used in order to understand the market reaction on the information related to fair value.Chapter 6 is the analysis on "functional fixation" of fair value information in order to examine the investors’behaviors. It uses statistical methods examines whether investors in Chinese capital market can "look through" profits or losses of fair value changes are not continuous, and can make out correct investment decisions.Chapter 7 is the analysis on earning management of fair value mainly to examine the listed companies’behaviors. It mainly checks whether listed companies have earning management on the profits or losses of fair value changes after implementing the new accounting standard by separating discretional accruals and non-discretional accruals in the regression model.Chapter 8 is the conclusion and prospects. It accounts for the main conclusion of this thesis, the limitations, and the expectations on future research and related suggestions.