Determinants and consequences of fair value accounting adoption: evidence from China

The idea of fair value accounting originates from well-developed capital markets, and it is questionable whether it can function well when the underlying markets for assets and liabilities lack liquidity, and when asset pricing lacks efficiency because of underdeveloped institutional environment. In this thesis, I explore the use and valuation usefulness of fair value measurement among the domestic listed companies in China during the ten-year period of 2007 to 2016. I also investigate the determinants and capital market consequences of firm-level fair value accounting adoption. Examination of the annual reports of the listed companies shows that the proportion of fair value-measured assets and liabilities is increasing over the years. Some companies provide additional information relating to fair value estimates as detailed as required by the accounting standards while many companies do not disclose such information or just put boilerplate in the footnotes. Different levels of fair values are found to be associated with analyst forecast accuracy in different ways and the fair value-related disclosure helps analysts’ interpretation of level 3 fair values. Analyses focusing on fair value-measured financial instruments show that fair value accounting could influence future firm-level stock price crash risk directly through the information uncertainty relating to the recognized unrealized fair value changes. There is also evidence that fair value accounting influences future stock price crash risk indirectly through selective sales of financial assets. The stock price crash risk effect is more pronounced among firms with regulatory incentives to manage earnings. Focusing on the subsequent measurement model choice of investment property, I find that institutional factors such as the development of underlying asset markets and state ownership could affect the use of fair value accounting in China. In addition, there is evidence of undesirable capital market consequences among firms with incentives to manage earnings through fair value estimates.