Presentation Formats Of Fair Value Gains/losses Of Financial Liabilities, Credit Risk And Investors’ Judgments

The fair value change attributable to changes in liabilities’credit risk has the counter-intuitive income statement effect when liabilities are measured at fair value and the entities’ credit risk changes. Because the financial information users are very apt to be misled by this counter-intuitive effect, International Accounting Standards Committee (IASB) published an exposure draft for comments on May,2010. In the exposure draft, IASB proposed a new accounting treatment for the portion of fair value change attributable to changes in liabilities’credit risk. By the proposal accounting treatment, the entity would back out this portion of fair value change from net income and present the amount in the other comprehensive income. It hasn’t been examined empirically whether the new proposal accounting treatment will help the financial information users correctly interpret the accounting information, or help investors make proper investment decisions and judgments. This study employs the theory and research results of cognitive psychology and examines the effects of credit risk and presentation formats of fair value change attributable to changes in liabilities’credit risk on individual investors’investment judgments and decision-making by experimental method.The current dissertation is composed of six chapters. Chapter one gives an overall introduction of this study; Chapter two firstly draws a brief conclusion in the opinions of the proponents and opponents about fair value measurement of liabilities, and then provides a review the literature in the research about the effect of the credit risk on the entity’s value and research about the judgment and decision-making of individual investors; Chapter three draws upon prospect theory and other theory in cognitive psychology to develop the hypotheses about the effect of the credit risk and the placement of fair value change attributable to changes in liabilities’credit risk on individual investors’investment judgments; Chapter four describes the current experimental design and related experimental procedures; Chapter five analyses the data and verify the hypotheses; Chapter six concludes the whole dissertation, summarizes the research results, and discusses the implications, limitations, and directions for future research.The main conclusions of the current dissertation are listed as follows:1. The theoretical analysis argues that different presentation formats of financial accounting information will exert different influence on individual investors’ investment judgments in spite of the same economical essence. Meanwhile, the presentation formats of the fair value gains/losses of financial liabilities and the change of credit risk have joint effects on individual investors’ investment judgments. In addition, individual investors’ composite appraisement for the entities’ management and investors’ P/E ratio judgment have mediation effects on the relationship mentioned above.2. The experimental results indicate that, when the presentation format of fair value change attributable to changes in liabilities’ credit risk is other comprehensive income, the P/E ratio and investment attractiveness judged by investors is higher when credit risk decreases than those when credit risk increases. While the P/E ratio and investment attractiveness judged by investors doesn’t have significance difference when credit risk increases and decreases. That is, only when the presentation format of the fair value change of financial liabilities is other comprehensive income, can individual investors correctly differentiate the credit risk change direction by their investment judgments.3. The experimental results indicates that the information valence(gains or losses) influences investors’ investment judgments change magnitude under different presentation formats of fair value changes of financial liabilities. Compared with the presentation formats as net income, the P/E ratio judged by investors increases when credit risk decreases and decreases when credit risk increases under the other comprehensive income presentation format, but the increasing magnitude is less than the decreasing magnitude. Compared with the presentation formats as net income, the investment attractiveness judged by investors increases when credit risk decreases and decreases when credit risk increases under the other comprehensive income presentation format, but the increasing magnitude is less than the decreasing magnitude. 4. The experimental results indicate that individual investors’ composite appraisement for the entities’ managements fully mediates the effects of presentation formats and credit risk change on investors’ P/E ratio judgments. While investors’ P/E ratio judgments partly mediates the effect of investors’ composite appraisement for the entities’ managements on investors’ investment attractiveness judgments.