Fair values and compensation contracting: Evidence from real estate firms

Darren Henderson

Journal of Business Finance & Accounting, 2022, vol. 49, issue 5-6, 627-657

Abstract: I compare the compensation contracting relevance of fair values (FVs) and market values in the setting of UK real estate firms and find that FVs are weighted more heavily than market values. I further find that FV weighting is increasing in FV estimate reliability and signal strength, while market value weighting is decreasing in FV estimate reliability. FV accounting represents a key trend over the past several decades with International Financial Reporting Standards permitting FVs to a greater extent than many national standards. My study provides a counterpoint to existing studies that find FVs are not useful for contracting with executives (DeFond et al., 2020; Livne et al., 2011). Furthermore, I find that FV is used as a performance measure in an efficient way that is dependent on the signal‐to‐noise ratio of FV estimates.

Date: 2022
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