Abstract
This study analyzed capital market investors’ recognition of the predictability of fair value-based valuation. It was examined if market investors overvalue the predictive value of fair value by comparing that value with that measured in accounting performance. The results reveal that investors are likely to overvalue fair value more than predictive values reflected in accounting performance. In particular, the results show that investors can gain abnormal returns through the market anomaly due to the functional fixation that investors cannot distinguish between unrealized profits and realized ones. Though there are considerable studies about accrual anomaly, few studies explore it with the separation of unrealized profits from total accruals. A number of studies about the causes of accrual anomaly have been conducted from various perspectives. The analysis of this study argues that the unrealized profits derived from fair value evaluation can be a cause of accrual anomaly. On the basis of the result, this study suggests that information about unrealized earnings should be reported separately.
Highlights
This study analyzed market investors’ perception of the predictability of fair value-based valuation
The results show that investors can gain abnormal returns through the market anomaly due to the functional fixation that investors cannot distinguish between unrealized profits and realized ones
The results of the analysis reveal that investors tend to overvalue fair value more than predictive values reflected in accounting performance
Summary
This study analyzed market investors’ perception of the predictability of fair value-based valuation. We identified that investors tend to overvalue the predictive value of fair value by comparing that value with that measured in reality in accounting performance. With the expansive application of fair value ac- problem of the reliability of fair value measurecounting, prior studies explored whether the ments, the significant results of valfair value evaluation has larger incremental in- ue relevance with fair value gains and losses of formation contents than the historical cost eval- some investment stocks has not been reported uation. Analyzing British firms, Aboody et al (1999) proved that the revaluation surplus of fixed assets has positive associations with future operating revenue and cash flow from operation They made a contribution in that it provided direct evidence that supports reevaluation as more useful for investors than historical cost, under the circumstance in which there are debates about the effectiveness of the reevaluation of fixed assets. Their research is meaningful in that it directly proved that the fair value of financial instruments has significant predictability in forecasting the profits and cash flows of financial instruments
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