Fair Value Accounting for Financial Assets. A Value Relevance Study in an Emerging Economy

There are few areas in accounting which generate debates as intense as measurement, and in particular fair values, because they directly impact the figures reported, as well as their credibility and relevance. The main argument in favour of fair values is that these are providing relevant information to the market participants. The main objective of our paper is to analyze if fair values reported by Romanian companies in their financial statements (more precisely in the case of financial assets) are value relevant. We therefore contribute to the little developed body of literature on the value relevance of fair value in emerging markets. We employ a model which is similar to that proposed by Barth (1994), based on the relation between the bank’s market value and its net assets, separated into financial assets and net asset before (excluding) financial assets. Furthermore, we also analyze whether value relevance of fair value accounting for financial assets varies with the three levels of the fair value hierarchy. Consistent with Barth (1994), we find that financial reporting at fair value of the financial assets has a greater explanatory power of the share prices compared to the historical cost reporting. Partially consistent with Song et al. (2010), we also document that financial assets reported at fair value within level 1 are value relevant, while financial assets of level 2 and level 3 are not value relevant.