The Research On Risk-relevance Of Fair-value Measurement

The banking and savings and loan crisis of the 1980s took place, FASB issued FAS 157 in September 2006 and the secondary mortgage loan crisis came up in the late summer of 2007. All the three events caused the accounting field to discuss about the fair-value risk relevance. Many American scholars researched on the above-mentioned subject by the way of the normal and positive methods. But the scholars from our country did the related researches in normal ways mainly. There were less positive researches. Moreover, with the issue of 2006's accounting standards for business enterprise, the listed companies especially the listed commercial banks put fair value in use in a large scope.Based on the background mentioned above, the paper chooses the 81 pooled cross section's data from the 2007's first season to the 2008's fourth season of 13 listed commercial banks which hold large and extensive financial instruments. It researches on the comparison of the volatility of fair-value earning and historical cost earning, and the association of the volatility of fair-value earning and that of the profits and losses on the changes in fair value with the systematic risk and the standard deviation of rate of the return on the stock price and the stock price. The paper arrives at the four conclusions:The first one is that the volatility of fair-value earning is not significantly different from that of historical cost earning. The conclusion shows that the volatility of earning has no increase although listed commercial banks use fair value to measure some assets and liabilities.The second one is that the standard deviation of fair-value earning has a significantly negative association with the systematic risk and that the standard deviation of the profits and losses on the changes in fair value has no significant association with the systematic risk.The third one is that the standard deviation of fair-value earning and that of the profits and losses on the changes in fair value have significantly negative associations with the standard deviation of rate of the return on the stock price.The fourth one is that the standard deviation of fair-value earning has a significantly negative association with the stock price and that the standard deviation of the profits and losses on the changes in fair value has no significant association with the stock price.The paper has three highlights of innovation: First of all, in the models of the volatility of earning with the systematic risk and the standard deviation of rate of the return on the stock price, the author adds three industrial variables which are loan and deposit ratio, the rate of non-performing loan and the rate of capital adequacy. The three variables can measure the risk which listed commercial banks face.Secondly, empirical results show that the volatility of fair-value earning is not significantly different from that of historical cost earning and the author gives the academic explanations. The positive literatures from abroad showed that the volatility of fair-value earning was significantly larger than that of historical cost earning, so there was no explanation associated with the above-mentioned no significant difference. At the same time, domestic literatures did not mention that. The author finds the academic reasons for the no significant difference mentioned above in a logistic reasoning. They are: first of all, the assets of our listed commercial banks whose changes in fair value are charged to the profits and losses are a small part of total assets; secondly, the assets of our listed commercial banks whose changes in fair value are charged to the profits and losses are mainly bond investment; thirdly, the paper chooses the season's data and so it influences the size of the standard deviation of the profits and losses on the changes in fair value.Finally, empirical results show that the standard deviation of fair-value earning has a significantly negative association with the systematic risk, and that the standard deviation of fair-value earning and that of the profits and losses on the changes in fair value have significantly negative associations with the standard deviation of rate of the return on the stock price. The author gives the academic explanations. There were no convincing explanations for the above-mentioned negative associations. The author finds the academic reasons are: the banks that face the low systematic risk have a large part of fair-value earnings, but the banks that face the high systematic risk have a small part; the banks that face the low standard deviation of rate of the return on the stock price have a large part of fair-value earnings or profits and losses on the changes in fair value, but the banks that face the high standard deviation of rate of the return on the stock price have a small part.