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  • Fiechter_Novotny-Farkas (2016) RAST_accepted

    Rights statement: The final publication is available at Springer via http://dx.doi.org/10.1007/s11142-016-9378-7

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    Available under license: CC BY-NC: Creative Commons Attribution-NonCommercial 4.0 International License

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

Research output: Contribution to journalJournal article

Published
<mark>Journal publication date</mark>03/2017
<mark>Journal</mark>Review of Accounting Studies
Issue number1
Volume22
Number of pages38
Pages (from-to)392-429
Publication statusPublished
Early online date21/11/16
Original languageEnglish

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.

Bibliographic note

The final publication is available at Springer via http://dx.doi.org/10.1007/s11142-016-9378-7