The Effect of Fair Value Method Adoption: Evidence from Real Estate Firms in the EU

Chinmoy Ghosh, Mingwei Liang, Milena T. Petrova

Research output: Contribution to journalArticle

1 Scopus citations

Abstract

The adoption of the International Accounting Standard 40 (IAS 40) in 2005 by public companies in the European Union required firms to disclose the fair value of their investment properties. We study whether this increase in the transparency in financial reporting reduces information asymmetry and leads to higher pricing efficiency and improved liquidity. We investigate this question in the context of the real estate industry, which due to its unique structure stands to be affected the most by the adoption of the fair value method. We observe that post regulation the coefficients of variation of trading volume and daily turnover decreased significantly, while turnover ratio increased significantly. In addition, these effects are stronger for larger firms. We further note that although post-IAS 40 asymmetric information decreases and liquidity increases, the disclosure of fair value does not lead to lower NAV deviation. Furthermore, our results suggest that fair value disclosure exacerbates NAV deviation and illiquidity during the crisis period.

Original languageEnglish (US)
Pages (from-to)205-237
Number of pages33
JournalJournal of Real Estate Finance and Economics
Volume60
Issue number1-2
DOIs
StatePublished - Feb 1 2020

Keywords

  • Fair value
  • IFRS
  • Information asymmetry
  • Net asset value
  • Pricing efficiency

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Urban Studies

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