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Recognition versus disclosure: evidence from fair value of investment property

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  • Doron Israeli

    (Interdisciplinary Center (IDC) Herzliya)

Abstract

The application of International Accounting Standard 40, Investment Property, in the European Union created a unique setting to study the implications of a decision to recognize versus disclose financial statements’ items, because in this setting recognized and disclosed investment-property-related amounts share a common measurement base, i.e., fair value. I use this setting to (1) explore a firm’s choice to recognize versus disclose fair values of investment properties, (2) test whether recognized and disclosed amounts are valued equally by investors, and (3) determine whether these amounts exhibit equivalent associations with future financial outcomes. To correct for self-selection concerns and assure I compare analogous amounts, I develop a selection model and construct investment-property-related amounts that differ only in whether their components are recognized or disclosed. I find that (1) contractual and asset-pricing incentives help to explain the recognition versus disclosure choice, (2) investors place smaller valuation weights on disclosed amounts, and (3) recognized and disclosed amounts exhibit statistically equivalent associations with future changes in net rental income and cash flows from operations. Taken together, the evidence suggests that managers are opportunistic in making the recognition versus disclosure choice and that even when recognized and disclosed amounts share an equivalent measurement base and are equally relevant for future financial outcomes, investors weight disclosed information less heavily in determining a firm’s value.

Suggested Citation

  • Doron Israeli, 2015. "Recognition versus disclosure: evidence from fair value of investment property," Review of Accounting Studies, Springer, vol. 20(4), pages 1457-1503, December.
    • Handle: RePEc:spr:reaccs:v:20:y:2015:i:4:d:10.1007_s11142-015-9335-x
    DOI: 10.1007/s11142-015-9335-x
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    Cited by:

    1. Audrey Hsu & Sophia Liu, 2025. "Recognition versus disclosure and stock price crash risk: Evidence from IFRS 16 adoption," Review of Quantitative Finance and Accounting, Springer, vol. 65(2), pages 749-776, August.

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    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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