Research On Economic Consequences Of Fair Value Hierarchy

The continuing use of fair value measurement has drawn the attention ofpractitioners, academics, policymakers, and regulators, fueling an extensivecontroversy on the merits and disadvantages of fair value accounting. Especiallyin times of financial crisis when credit channels tighten, and the liquidity ofbalance sheet has drawn much attention. The negative effects of using fair valuemeasurement principles have been widely criticized. After the extensive andcontinuing controversy, fair value measurement has withstood the severe test ofthe global financial crisis, and has been gradually accepted and become themainstream trends of future accounting measurement. During the post financialcrisis era, the decision usefulness of fair value measurement in financialreporting framework and formulating specific standards plays an apparent role.The tradeoff between relevance and reliability of fair value, and the economicconsequences of fair value measurement have become important issues of theconcerned parties. Basically, the economic consequences of fair valuemeasurement involves the influence of fair value of the capital market pricingability, the influence of fair value of the capital market information transmissionability, and the influence of fair value of the capital market information risk. Theresults of prior research is mixed because of the different exists in the economicenvironment, model building, and sample selecting et al. This makes the aboveproblems become one of the most controversy issues.In this context, it is meaningful to make the problems associated with fairvalue measurement clear as soon as possible and carry on comprehensiveinvestigation on the economic consequences of fair value for enhancing thequality of accounting information, guiding the rational allocation of socialresources, and protecting the benefit of investors and the public. To do this,considering the reality of economic environment of China, in this paper, I try toreview and study the above heated issues on the basis of discussing the concepts associated with fair value, and then address my suggests about the findingproblems.The academics firstly raised doubts about the concept of fair value in theprocess of discussing fair value. Concept is the logical origin of research. Thelogic of concept developing provides logic basics for each categories of sciences.The dialectics of concept developing profoundly shows the logic of humanthoughts movement. In order to make the research logic and research category inthis paper consistent, the relevant important concepts, including fair valuemeasurement, economic consequence, relevance and value relevance,synchronicity, and information risk are defined firstly in this paper. This providesa clear concept and logic framework for the following chapters.Only if we can basically understand the cause of using fair value, will weinterpret the consequences better, and get some meaningful conclusions,therefore address targeted suggestions. According to this route, this chaptermakes a detailed analysis about the changes of principles around the economiccrisis. At the same time, this chapter finds several typical facts about the origin offair value through summarizing specific items of profit recognition in advance atdifferent stages and levels. Thus then, this chapter points out the potentialreasons and regulations behind the fair value application.Using a sample of listed financial firms in Shanghai and Shenzhen StockExchanges from2007to2012, based on the modified Ohlson (1995) model,chapter4empirically tests the value relevance of fair value hierarchy information,and examines the impact of firms’ corporate governance mechanisms of the valuerelevance of fair values hierarchy information. I find that level1fair values arevalue relevant, but level2and level3fair values are not value relevant, the valuerelevance of level1and level2fair values are great than level3fair val ues. Levelinformation interacted with existing asset and liability Type information has agreater explanatory power for firm value than does Type information alone. Inaddition, I find evidence that the value relevance of level1fair values are greaterfor firms with strong corporate governance. For the reason that the researchstarted before the release of fair value measurement principle in China. There isnot enough guidance for disclosing fair value information, with a result that thereVI is not a unified format for listed companies to disclose their fair value information,and the disclosure is not enough. After the fair value measurement becomingeffective, investors will increase the weight of level2and level3fair values whenassessing the value of a company, thus then, the usefulness of fair valueinformation will increase.As for the influence of fair value of the capital market informationtransmission ability. Using a sample of listed financial firms in Shanghai andShenzhen Stock Exchanges from2008to2012, based on the model used byFrench and Roll (1986), Roll (1988), and Piotroski and Roulstone (2004), chapter5calculates the stock price synchronicity of listed companies who disclosing fairvalue hierarchy information, and empirically test the relationship between fairvalue hierarchy information and synchronicity. I find that market and industryexplain63.3%of sample firms’ stock daily return rate. This rate is much higherthan developed countries, even much higher than the average rate of Chinesecapital market. Assets measured at fair value enhance the firm-specificinformation content of stock price. Level1and Level2assets provide usefulfirm-specific information, and Level3assets provide less useful information.Although fair value measurement information enhances firm-specific informationinto stock price, at the same time, it exacerbates the co-movement of stock price.Based on the perspective of corporate governance mechanisms, using asample of listed firms in Shanghai and Shenzhen Stock Exchanges from2008to2012, chapter6studied the relationship between fair value hierarchymeasurement and information risk. We found that information risk of financialinstruments designated as fair value level1,2, and3is monotonicall y increasing.Strong corporate governance reduces information risk of assets priced at fairvalue, especially strong corporate governance can obviously reduce theinformation risk of less reliable assets priced at fair value. For the liabilitiespriced at fair value, corporate governance doesn’t significantly reduce theinformation.To sum up, in order to improve the application of fair value and the qualityof accounting information, and effectively prevent the negative influence broughtby the fair value measurement. We suggest that the government and decision-making departments should improve the transparency of information inthe capital market and reduce the impact of noise on stock prices via relatedpolicies implementation. Together with the fair value measurement standardsimplementation, standard-setting institutions should consider the information riskbring by fair value seriously, and strengthen the regulation for using fair valuemeasurement. Standard-setting institutions should take enough supervision overinputs using for estimating fair value. Meanwhile, to reduce the informationasymmetry, regulators should standardize the corporate governance of listedcompanies via optimizing equity structure, the arrangement of the board ofdirectors system and executive compensation, etc.