The impact of the institutional environment on the value relevance of fair values

Peter Fiechter () and Zoltán Novotny-Farkas
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Peter Fiechter: University of Neuchatel
Zoltán Novotny-Farkas: Lancaster University

Review of Accounting Studies, 2017, vol. 22, issue 1, No 11, 392-429

Abstract: Abstract Most prior studies attribute valuation discounts on certain fair valued assets to measurement error or bias. We argue that institutional differences across countries (e.g., information environment or market sophistication) affect investors’ ability to process and impound fair value information in their valuation. We predict that the impact of the institutional environment on value relevance is particularly pronounced for reported fair values of assets designated at fair value through profit or loss (hereafter, “FVO assets”), for which investor experience is lowest and complexity is highest. Using a global sample of IFRS banks, we find that FVO assets are generally less value relevant than held-for-trading assets (HFT) and available-for-sale assets (AFS). By partitioning countries into market- and bank-based economies to proxy for institutional differences, we find that the valuation discount on FVO assets is more pronounced in bank-based economies. Additional tests suggest that this valuation discount is attenuated by a richer firm-level information environment and the presence of institutional investors with fair value experience.

Keywords: Fair value accounting; International financial reporting standards (IFRS); Value relevance; Institutional accounting; Information environment; G21; M41 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (12)

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DOI: 10.1007/s11142-016-9378-7

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