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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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6 Analysis of investors’ judgments and investment decisions


6.1 Methodological approach 6.1.1 Preliminary considerations In the previous chapter, archival data was used to examine the implications of fair value accounting on properties of financial analysts’ forecasts. This approach is viewed as ade- quate because analysts’ forecasts are easily observable and can therefore be used for empiri- cal research. However, when doing archival research, problems could emerge in circum- stances when archival data cannot easily be obtained from databases or other sources such as annual reports or when data cannot be collected. In addition, another disadvantage of archival research is that the effect of an independent variable cannot be isolated from oth- er factors. In many circumstances it might also be the case that archival data is created for a special purpose, such as various political, legal, or financial reasons other than for the intended analysis and does not provide the exact information needed (Wang (2010), p. 31). Therefore, when examining the implications of fair value measures on investors’ judgments and investment decisions, an archival-based approach seems not to be appro- priate as the behavior of investors cannot easily be observed. For this reason, an experi- mental-based approach is used in order to examine investors’ behavior when confronted with fair value measures. A major advantage of doing experimental-based research is that it allows making causal statements in a way that a circumstance caused a change in behavior (Martin (2000), p. 26). Experiments are research studies in which the variance of all, or nearly all, of the pos- sible influential...

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