Market Perceptions of the Informational and Comparability Effects of Fair Value Reporting for Tangible Assets: US and Cross-Country Evidence
This paper examines equity market perceptions of fair value reporting for tangible assets. Specifically, we exploit events affecting potential US adoption of fair value reporting for investment property (i.e., real estate) assets, one of the largest asset classes in the world. If adopted, this would converge the reporting of investment property assets in the US (which require depreciated historical cost reporting) with IFRS (which require either the balance sheet reporting or footnote disclosure of these fair values). We identify six sample events—four designated as increasing, two as decreasing—the likelihood of fair value reporting in the US. Using a sample of US investment property firms with an aggregate market capitalization of $800 billion, we first document a significantly positive market reaction for movement towards fair value reporting. We then confirm cross-sectional predictions that this reaction is increasing for firms with (i) greater commitment to high quality reporting, (ii) greater investor demand for fair values and convergence with international standards, (iii) less risk, and (iv) staler asset values. These results are consistent with the equity market anticipating net benefits from movement towards fair value reporting for this asset class, which are associated with an improved information environment and/or convergence with international standards. Finally, using a sample of non-US firms, we document a similar positive market reaction to the increased likelihood of fair value adoption in the US. Critically, because there are no direct changes in the information reported by the US firms, this provides evidence consistent with anticipated comparability benefits of moving towards fair value.