Fair Value Accounting And The Information Environment Of Capital Market

In this dissertation,I study the impact of fair value accounting on the information environment of capital market.In the theoretical analysis,I define financial information quality,which is used as a proxy for information environment,as the ratio of observable idiosyncratic information to total idiosyncratic information.I show that financial information quality is positively related to the synchronicity of stock price.Moreover,financial information quality can be expressed as a function of number of analyst forecasts,mean square error and standard error of analyst forecasts.In particular,financial information quality is positively correlated with the number and standard error of analyst forecasts,and negatively correlated with the mean square error of analyst forecasts.Based on the theoretical model,I firstly test the impact of fair value accounting on the synchronicity of stock price.I find that the weight of assets and liabilities measured by fair value(fair value ratio)is positively correlated with the synchronicity of stock price.Thus,the application of fair value accounting probably lowers the financial information quality.Second,I empirically test how fair value accounting affects analyst forecast.Results show that fair value ratio is positively crrelated to accuracy of analyst forecast,and has no significant impact on dispersion of analyst forecast.I then calculate the financial information quality based on the model derived in theoretical analysis.I find that fair value ratio is positively correlated with financial information quality.Thus,the application of fair value accounting improves the financial information quality for those companies followed by analysts.The results imply that information intermediary has structural influences on the relation between fair value accounting and financial information quality.Due to the heterogeneity of investors in skills,the application of fair value accounting could make the analysis of financial data more difficult for less skilled investors,giving them disadvantages on information.Thus,fair value accounting could be associated with information asymmetry in transactions.Empirical tests on bid-ask spread confirm this conjecture.Overall,the results imply that the application of fair value accounting could have negative impact on the information environment of capital market.However,for those companies with information intermediaries,the application of fair value accounting will improve the information environment.