The Effects of Non-Financial Asset Fair-Value Recognition on Nonprofessional Investors' Judgments

Abstract

I examine the impact fair-value recognition of non-current assets (NCAs) has on the judgments of nonprofessional investors. The results show nonprofessional investors (business conference attendees) express less willingness to invest when fair-market values for NCAs are recognized along with historical cost values. Participants judged future company performance the same regardless of fair-value recognition, but confidence in their own judgments was lower for nonprofessional investors receiving recognized fair-market valuations. Conversely, fair-value recognition increased participants' confidence of individual balance-sheet account valuations, which suggests asymmetrical confidence effects on nonprofessional investors' judgments. The results indicate that nonprofessional investors view income from fair-value changes as persistent, which is contrary to normative economic predictions. Participants universally judged historical cost values as more reliable than fair values, but I find financial-statement-group assignment affects relevance judgments. I conclude fair-value recognition does affect nonprofessional investors' judgments, and the results should be of interest to standards-setters, academics, and the investment community alike as the debate surrounding balance-sheet valuations continues.