The value relevance of fair value accounting information during financial crisis
Authors: Chin-Chen Yeh, Hui-Cheng Yu
Journal: Chiao Da Management Review. Dec. 2014, 34(2): 1-26.
Keywords: Financial crisis; Fair value accounting; Value relevance; Accounting-based valuation model
Abstract:
The main purpose of this study is to examine if fair value accounting information remains relevant in the
event of a financial crisis. The research period ranges between 2000 and 2008. We use data from 497 listed
firms in Taiwan. We will use Ohlson’s (1995) accounting-based valuation model. Results indicate that after
implementation of fair value accounting, accounting information reported by fair values becomes more value
relevant than accounting information reported by historical costs, and such fair value accounting information
also has higher explanatory power for stock prices. In addition, as the book value of equity becomes more
relevant to the market value, the value relevance of earnings will significantly decline. However, when the
effect of financial crisis is considered, the value relevance of accounting information reported by fair
values becomes different. This finding also implies that there will be a structural change in the investors’
perception of accounting information in the event of a financial crisis. In this study, the value relevance
of accounting information during non-crisis periods is also observed. In general, fair value accounting
contributes to higher value relevance of accounting information. Therefore, if the fair value of firm assets
and liabilities are properly and objectively determined, the firm valuation result can be more accurate, and
accounting information will also become more relevant. To this end, the authority responsible for
development of accounting standards should offer more guidelines to compilers of financial statements and
build a better valuation system that can generate more relevant information to users of financial
statements.