Abstract
This study investigates the effect on nonprofessional investors’ judgements and decisions of discretionary measurement choices. Using a paper-and-pencil experience, we collect and analyze information regarding investment amounts as well as past and future financial performance judgements of firms’ earnings by manipulating fair value (mark-to-market and mark-to-model) criteria and benchmarking it with historical cost-based financial statements. We proxy nonprofessional investors with graduate students from a business school. Our results show evidence that nonprofessional investors view fair value changes as permanent. We argue for a cashflow volatility factor. Contrary to previous research, we do not find evidence of any effect on investors’ willingness to invest (average budget amounts invested) or performance judgments (past and future). We corroborate previous evidence that investors rank measurement concepts’ relevance differently for different classes, although, on average, mark-to-market fair values and historical cost are rated more relevant and reliable than mark-to-model fair values.
Highlights
When market prices reflect all value-relevant information, significant advantages of fair value accounting emerge as market prices equal value in use, but only under perfect and complete markets assumption
Standard setters and regulators may find that our results present effects on judgement and decisions of nonprofessional investors that are statistically and economically relevant and, should be balanced in their work
The aforementioned studies focus on investors’ reactions to unrecognized gains and losses regarding changes in the value of financial assets and liabilities for which liquid markets already provide mark-to-market fair values and under a financial reporting that requires mandatory recognition of those changes in its values. We extend those studies by providing evidence for additional items where fair value changes are optional and under a financial reporting environment where firms are able to use level 3
Summary
When market prices reflect all value-relevant information, significant advantages of fair value accounting emerge as market prices (fair value) equal value in use, but only under perfect and complete markets assumption. A paper by Gassen and Schwedler [2] surveys professional investors to identify the decision usefulness of different accounting measurement concepts They find that respondents distinguish between mark-to-market and mark-to-model fair values. We make some bridging to their conclusions by assessing the relevance and reliability of different classes of assets and by surveying familiarity with mark-to-market and mark-to-model fair values. We extend their analysis by researching the effect of measurement criteria on relatively less sophisticated investors, which have been declared by supervisors and regulators as the main concern when looking for improvement on regulation.
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