Research On The Value Relevance Of Fair Value Accounting

Measurement is the core function of accounting system. As the one looking into the future and facing the 21 century (Huang, 2001),fair value measurement itself is a very meaningful topic which deserves researching. During the current global financial crisis arisen from the US mortgage-backed securities problem, fair value accounting was seriously blamed by bankers and some political organizations; while almost at the same time, China announced her new set of financial accounting standards whose highlight was exactly the employment of the fair value measurement in most of its standards. Under such the background, I focused my research on the value relevance of fair value accounting in Chinese capital market, both with theoretical analysis and empirical tests. These results may help the standard setters to consider to what extend and at what level shall the fair value measurement apply.The whole dissertation can be divided into four parts, research basis, theoretical analysis, empirical tests and research conclusion with suggestions.Chapter 2 and chapter 3 constitute the research basis, mainly about the historical development of fair value accounting practices and literature review. In chapter 2, I discussed the fair value accounting development in US Statement of Financial Accounting Standards system, in IASB International Financial Reporting Standards system and in the Chinese Accounting Standards system, also the main debate on fair value accounting during the global financial crisis, emphasis on the operational significance of a thoroughly study on the value relevance of fair value accounting in Chinese capital market. Chapter 3 discussed literatures on fair value, value relevance and the value relevance of fair value accounting, just to find out the lack of empirical tests aimed at the Chinese capital market and the lack of empirical evidences on value relevance differences of fair values with different inputs levels. Then I decided to focus my research on the value relevance of fair value accounting in our capital market from the fair value hierarchy's approach.The theoretical analysis are developed in chapter 4 and chapter 5, mainly about the theory basis of relevance tests, the decision usefulness of fair value accounting, the fair value hierarchy and accounting measurement errors. In chapter 4, I discussed the possibility of conducting value relevance tests with valuation models under the market efficiency theory, through a shortly review of the derivation of the Ohlson valuation model; then the decision usefulness of fair value measurement and fair value accounting are considered from both an information perspective and a measurement or valuation perspective, which supports the later empirical tests theoretically. Chapter 5 considers the price movement errors and price measurement errors from an econometrics'view, then combined with the fair value hierarchy theory, it concludes that fair values with different inputs levels differ in measurement qualities, so while conducting empirical tests, fair value hierarchy will possibly have significant effects on value relevance. Only be aware of this fact and distinguish different industries or enterprises with different asset structures, can a perfect conclusion be expected in a relevance study on fair value measurement.The empirical tests are reported in chapter 6 and chapter 7, each test the value relevance of fair value practices with evidences from the close-end funds and the banking & insurance companies. The asset structure of close-end funds is very simple compared with other entities, for 90% of which are investment securities. For this reason, it is a very good sample for relevance tests of"mark-to-market"values. The results show that fair value metric is decision useful, it increases the value relevance besides historical cost, and, it will more relevant if been reported in the statement instead of just been disclosed. The banking and insurance companies may be one of the most influenced industries by fair value requirements, empirical evidences from these companies also show that fair value is relevant besides historical cost measurement, but according to the valuation reliability, the effects from"principal-agent theory"is more powerful than that from the"information asymmetry theory", for"mark-to-model"estimations are significantly trusted less than"mark-to-market"values by market participants.Chapter 8 is about conclusions, policy suggestions and thoughts and plans on future researches. After those theoretical conclusions and empirical results are summed up, I suggest insisting fair value measurement in future Chinese accounting standards system, setting up a unified and comparable standard on fair value measurement and at the same time, especially strengthening regulations on valuation technologies and process of"mark-to-model"estimates, taking precautions against the effects of valuation premise. Also, I summarized the limitations of my dissertation before ending, with future research plans and my continuous concern on this topic.