“Market Perceptions of the Informational and Comparability Effects of Fair Value Reporting for Tangible Assets: US and Cross-Country Evidence” by Dr. Lihong Liang
Dr. Lihong Liang
Associate Professor in Accounting
Whitman School of Management
This paper examines equity market perceptions of fair value reporting for tangible assets. Specifically, we exploit six events—four designated as increasing, two as decreasing— affecting the likelihood of US adoption of fair value reporting for investment property (i.e., real estate) assets, one of the largest asset classes in the world. Adoption would facilitate convergence of US reporting for this asset (which currently requires depreciated historical cost) with IFRS (which requires either recognition or disclosure of fair values). Using a sample of US investment property firms, we document a significantly positive market reaction for movement towards fair value reporting, which is increasing for firms with (i) greater commitment to high quality reporting, (ii) greater investor demand for fair values and convergence with international standards, and (iii) staler asset values. Using a sample of non-US investment property firms, we further document a positive market reaction to the increased likelihood of fair value adoption in the US. Results for the US (non-US) sample are consistent with the equity market anticipating net benefits from movement towards fair value due to expected improvements in information and/or comparability (comparability only—as the non-US firms have no direct changes in the expected information reported).