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Fair Value Accounting

Implications for Users of Financial Statements


Kristian Bachert

Fair value accounting is viewed as a major feature of IFRS and several standards either require assets to be measured at fair value or at least provide an option to fair value measurement instead of applying historical cost. While it is argued that fair values provide more timely and relevant information, the global financial crisis led to a considerable debate about the usefulness of fair value accounting. The study examines the implications of fair value accounting for financial analysts and nonprofessional investors. It provides evidence that, even if financial analysts find it challenging to produce accurate forecasts under a fair value regime, nonprofessional investors make larger investments and are more confident with their judgments for fair value firms.


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4 Theory and hypotheses development


4.1 Theoretical foundation This study is classified into the theoretical scientific concept of the critical rationalism. Under this approach, an empirical research strategy is used in a way to develop hypotheses based on theory and prior research to either confirm or reject the hypotheses against em- pirical data. As related literature has already been reviewed, this chapter presents the rele- vant theory for the development of the hypotheses necessary for the two empirical studies. First, the theoretical approach of the agency theory is presented. Second, the chapter pre- sents the theory of efficient markets as this approach is necessary to explain why financial analysts’ forecasts may be beneficial for investors. 4.1.1 Agency theory Agency theory as a part of the new institutionalism The new institutionalism is based on neoclassical economics but does not require the simplified and easy-to refute assumptions.111 Therefore, the new institutionalism appears to be closer to transactions as they are likely to occur in reality. The new institutionalism does not assume a perfectly competitive capital market with complete information availa- ble to every trader and free access to the financial market with trading at no cost and in particular accounts for asymmetric information in the market and transaction costs. How- ever, when the assumptions of the neoclassical economics do no longer hold under the new institutionalism, the results of perfectly functioning markets that result from neoclas- sical economics cannot longer be valid (Schmidt/Terberger (2006), p. 399ff.). It is then more likely to think of certain friction...

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