Fair value accounting and earnings variability: Evidence from global real estate firms

Abstract

This study explores the relationship between earnings quality and fair value accounting beyond market-based measures, financial industry-related settings, and US firms. It analyzes the effect of discretionary fair value measurement of investment properties and earnings distribution using a sample of 2,658 observations between 2006 and 2017 from real estate firms in 36 countries. The results indicate that applying the fair value model to investment properties subject to International Financial Reporting Standards (IFRS) increases earnings variability and decreases earnings smoothness. These links are found for a fair value model dummy and incrementally for investment property fair values. Managers do not seem to exploit their discretion in lower-level fair value measurements to smooth out further earnings fluctuations. Among fair value model appliers, earnings variability appears to further increase, and earnings smoothness appears to further decrease, in the case of strong investor protection and real estate sector-specific institutional governance.