Empiircal Research On The Correlation Between Listed Companies' Market Value And Fair Value Changes

Empirical Research on the Correlation between Listed Companies'MarketValue and Fair Value ChangesCombined with the development of the economy and emergence of a large number offinancial instruments, financial accounting information measured by historical cost has beenincreasingly unable to meet the needs of information users. During the late 1980s, the outbreak ofthe United States' credit and savings crisis increasingly promoted the application of fair value forevaluation of financial instruments in the United States. During the early 1990s, the fair valuemeasurement was firstly introduced into accounting standards for financial instruments in theUnited States. Subsequently, International Financial Reporting Standards gradually adopted thefair value measurement. More and more countries and districts adopted the fair valuemeasurement from then on.Not only the Financial Accounting Standards Board (FASB) in United State, but also theInternational Accounting Standards Board (IASB), is shifting from the traditional historical costmeasurement to fair value measurement. Undoubtedly, this shift will have a profound impact onthe international financial accounting practice and theory. At the same time, not only between theaccounting standard setters and the related regulatory agencies, but also between accountingtheory and practice, there are fiercely debates on the effects caused by extensive application of thefair value measurement and the correlation of fair value with market prices, etc. Accuses on fairvalue prevail, especially in the time of this financial crisis. Application of fair value measurementin China is fairely difficult. In order to strengthen the convergence and coordination of Chineseaccounting standards with International Financial Reporting Standard, fair value measurementwas re-introduced into the new system of accounting standards promulgated in 2006, that isAccounting Standards for Enterprises (2006) and Its Application Guide. An arryay of actions shedprominent lights on the new accounting standards. It is consistent with the developing trend ofinternational accounting measurement, as well as useful for the objective requirements of China'seconomic development. Meanwhile, it shows that standard setters and academia can no longerhold an evasive attitude against fair value measurement. Better application of the fair valuemeasurement is the main topics for related sectors. Combined with the above background and the relevant research results by the domestic andforeign scholars, the article evaluates the application effect of fair value measurement in Chinabased on price model, return model, panel data and regression analysis, so as to investigatewhether the application of fair value measurement improves the quality of accounting informationin China and tests the correlation of values with listed companies'disclosed information. UsingHu-Shen 283 listed companies'quarterly data from 2007 to 2010, combined with two substitutevariables which are net changes in fair value of available-for-sale financial assets, profit and lossfrom fair value changes, we tested the relationship between substitute variables, stock marketvalue, and return rate.The article's main contents are as follows:The first chapter: introduction. It briefly introduces the background, significance of topics,structure framework, research methods, further research opportunities, and the principalinnovation of this article.The second chapter: literature review. This chapter reviews the literature dealing with the fairvalue comprehensively from two aspects which are theoretical studies and empirical studiespublished in China and other countries. It also analyzes systematically the achievements andshortcomings in the field in order to form the perspective of the article.The third chapter: development process and motivation of fair value measurement. Thischapter introduces fair value measurement which is used in China: it contains three periods:'advocate (1991-2000)','avoid (2001-2005)'and're-introduce (2006-present)'.Then it gives adetailed analysis of the domestic and international motivation toward the application of fair valuemeasurement.The fourth chapter: research design. Firstly, it gives the hypotheses of the research; secondly,it gives the definitions and explanations of the selected variables and data sources; finally, a paneldata model is introduced.The fifth chapter: empirical research on the correlation of fair value with market value. Thischapter makes an empirical test on fair value using price and return models, panel data, regressionanalysis and so on.The sixth chapter: robustness test on the correlation of fair value. In order to make a furthertest on the correlation of fair value, we test the robustness test on the correlation of fair value by adding listed companies'risk, scale and proportion of outstanding shares into price model andreturn model.The seventh chapter: price model's test on the correlation of fair value with market value foreach industry. This chapter adopts price model to test the correlation of fair value for eachindustry in order to show the application effect of fair value measurement.The eighth chapter: way to improve the test on fair value measurement. This chapteranalyzes the factors which have influence on fair value measurement on the basis of empirical test.It also discusses the necessity to build a unified framework of fair value measurement.Furthermore, we makeup rules on the unified framework of fair value measurement and unifiedframework of fair value measurement.According to empirical research, the article's conclusions and focus are three-folds:(一) There is a significant correlation between net changes in fair value of available-for-salefinancial assets, profit and loss from fair value changes and stock price, that shows valuerelevance. Moreover, the value relevance based on profit and loss from fair value changes ishigher than the value relevance based on net changes in fair value of available-for-sale financialassets. To some extent, fair value information has a value based on financial statements which areprepared on the new accounting standards.(二)According to price model's regression analysis based on three sets of data((2007-2008),(2009-2010),(2007-2010)), joint explanatory power of accounting data from 2009 to2010 on stock price is more robust than joint explanatory power of accounting data from 2007 to2008 on stock price. While, joint explanatory power of accounting data from 2007 to 2010 onstock price is more robust than joint explanatory power of accounting data from 2007 to 2008 onstock price and accounting data from 2009 to 2010. It conveys the fact that the correlationbetween net changes in fair value of available-for-sale financial assets, profit and loss from fairvalue changes and stock price shows an enhanced trend with increasing samples and years.(三) The result of robust test shows that the listed companies'risk, scale and proportion ofoutstanding shares have an ability to explain the stock price. There is equivalent value relevancebetween net changes in fair value of available-for-sale financial assets, profit and loss from fairvalue changes and stock price when three controlled variables are added. It also conveys the factthat the market actively responds to this new measurement method. Combined with the above research results, the article establishes a unified framework of fairvalue measurement on the basis of the specific analysis of the factors that affect the fair valuemeasurement and given rules on the unified framework of fair value measurement.