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Acquisition and integration of fair value information on liabilities into investors' judgments

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  • Maik Lachmann
  • Arnt Wöhrmann
  • Andreas Wömpener
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    Abstract

    Purpose – The International Accounting Standards Board and the Financial Accounting Standards Board allow fair value measurement of liabilities. Previous findings from the literature on recognition versus disclosure indicate that recognition of fair value information better serves investors' needs, because it is more likely to facilitate the incorporation of the information into their judgment. In cases of credit risk changes for own liabilities, however, many authors doubt that fair value measurement is beneficial due to its potential counter-intuitiveness. The purpose of this paper is to gain insight into non-professional investors' processing of fair value information for liabilities. Design/methodology/approach – A between-subjects laboratory experiment was employed. Subjects received financial information on three different companies. The authors manipulated the accounting treatment of liabilities between the three groups. Subjects ranked three companies according to their economic performance. The authors then compared these rankings to the companies' actual performance. Findings – The results of the experiment indicate that non-professional investors are less likely to acquire the information of credit risk changes when liabilities are not measured at fair value. Additionally, evidence was found that fair value measurement is to some extent counter-intuitive for non-professional investors. Research limitations/implications – A main limitation is that our experiment concentrates on liabilities and abstracts from interactions of both sides of the balance sheet. Originality/value – This is the first study to analyze in detail non-professional investors' information processing of liabilities measured at fair value.

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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Review of Accounting and Finance.

    Volume (Year): 10 (2011)
    Issue (Month): 4 (November)
    Pages: 385-410

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    Handle: RePEc:eme:rafpps:v:10:y:2011:i:4:p:385-410

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    Web page: http://www.emeraldinsight.com

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    Related research

    Keywords: Creditworthiness; Decision making; Fair value; Fair value accounting; Financial information; Investors; Liabilities;

    References

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    1. Espahbodi, Hassan & Espahbodi, Pouran & Rezaee, Zabihollah & Tehranian, Hassan, 2002. "Stock price reaction and value relevance of recognition versus disclosure: the case of stock-based compensation," Journal of Accounting and Economics, Elsevier, vol. 33(3), pages 343-373, August.
    2. Tversky, Amos & Kahneman, Daniel, 1986. "Rational Choice and the Framing of Decisions," The Journal of Business, University of Chicago Press, vol. 59(4), pages S251-78, October.
    3. Urs Fischbacher, 2007. "z-Tree: Zurich toolbox for ready-made economic experiments," Experimental Economics, Springer, vol. 10(2), pages 171-178, June.
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