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. We identify six events—four designated as increasing, two as decreasing—affecting the likelihood of US adoption of fair value reporting for investment property (i.e., real estate) assets, one of the largest asset classes in the world. Fair value adoption would facilitate convergence of US reporting for this asset (which currently requires depreciated historical cost) with IFRS (which requires either recognition or disclosure of fair values). Using a sample of US investment property firms, we document a significantly positive market reaction for movement towards fair value reporting. Consistent with cross-sectional predictions, we find this reaction is increasing for firms with greater commitment to high quality reporting, greater investor demand for fair values and convergence with international standards, and staler asset values. Using a sample of non-US investment property firms, we again document a positive market reaction for these non-US firms to the increased likelihood of fair value adoption in the US. We infer the results for the US (non-US) sample as consistent with anticipated net benefits due to expected improvements in information and/or comparability (comparability only—as the non-US firms already report fair values).