Fair Value Layered Disclosure, Information Asymmetry And Corporate Governance

Very few accounting standards have been as controversial as fair value measurement which has experienced retention and abolishment many times. In order to eliminate the influence of the financial crisis on the global economy as soon as possible, improve the reliability of the capital market information, and restore financial stability, countries around the world hold meetings one after another to discuss the causes of the financial crisis and its impact on global economy, and take active measures to tackle the financial crisis. Fair value measurement has withstood the tests of all sides, and eventually become the future direction and development trend in the accounting measurement.Whether the Financial Accounting Standards Board(FASB) and International Aaccounting Sstandards Board(IASB) of the U.S. or the Ministry of Finance in our country, in their fair value criteria are required that enterprises establish a fair value layered disclosure that prioritizes the inputs used to measure fair values at three broad levels, considering the relative reliability of the inputs to fair value measurements. Level 1 inputs are quoted prices in active markets, and a quoted price is a single primary basis for the fair value measurement. Therefore, the information asymmetry between preparers and users is very low for Level 1 inputs. Level 2 inputs include either observable prices in active market for comparable assets and liabilities or observable market prices in inactive markets for identical assets and liabilities. Level 3 inputs are not observable from the market and reflect management’s assessment of the assumptions that market participants would use in pricing the asset or liability.Under the fair value measurement framework, the three levels of fair value layered disclosure are beneficial to investors and other financial report users to fully understand and evaluate the reliability of fair value. And improving the level of information disclosure can reduce the possibility of self-interest which is obtained through the information collection, also can reduce the information asymmetry between potential investors. By full disclosure policy, financial report can help investors to get more information, to reduce adverse selection, and in turn promote the market operation and reduce its incompleteness. Fair value measurement helps listed companies to disclose unified information, and calls for expanding the fair value disclosures. Its purpose is to improve the transparency of financial information, and to reduce the information asymmetry and financial risk. But, during the global financial crisis, it is reasonable for investors to worry about the information risk of banks, who disclosed information according to SFAS No. 157, because less reliable valuation information will definitely increases information asymmetry. If the fair value measurement standards can improve the information content of fair value, the relationship between assets or liabilities measured in fair value and the information asymmetry should be decided by the level of inputs which is used to measure fair value.The existing researches have tested the value relevance of fair value, and the potential cause for managers to provide a wider range of fair value is to eliminate the worries about the reliability of fair value of financial report users. Based on such consideration, also in order to investigate the information content of fair value valuation, this paper based on domestic and foreign research literature and theory, esp. fair value measurement related theories, asymmetric information theory and principal-agent theory as the foundation, embarks from the economic realities of China, examines the influence factors of fair value disclosures, information asymmetry, and the relationship between the corporate governance and information asymmetry, and gives the corresponding policy recommendations. In this paper, the research provides useful suggestions and references for our country’s financial markets opening and financial regulationThe Ministry of Finance of China issued "Accounting Standards for Enterprises No. 39—Fair Value Measurement" on January 26, 2014 and became effective since July 1, 2014. Although the Ministry has not required listed companies to disclose the fair value layered measurement information, some listed companies have started to disclose the fair value layered information voluntarily since 2007, which provides data support for the research of this paper.Taking some listed financial firms in Shanghai and Shenzhen Stock Exchanges from 2007 to 2013 as samples, Chapter 4 empirically tests the factors which influence the disclosure of fair value layered information. I find that if the company has more assets measured in level 1 fair values, it will disclose more fair value layered information, but level 2 and level 3 fair values do not have the same influences. If the company has more liabilities measured in level 1 and level 2 fair values, it will disclose more fair value hierarchy information, but level 3 fair values do not have the same influences. The industry category that listed companies belong to and its corporate governance have significant effect on its fair value disclosures.Information asymmetry hinders the normal operation of the market, and it is an important cause of market incompleteness. Using a sample of listed financial firms in Shanghai and Shenzhen Stock Exchanges from 2007 to 2013, Chapter 5 empirically tests the relationship between fair value leyered disclosure and information asymmetry, meanwhile Chapter 5 examines the impact of corporation governance on reducing information asymmetry. I find that the net assets measured with fair value can reduce information asymmetry. Level 1 and level 2 net assets are more reliable, and significantly reduce the information asymmetry between investors, but level 3 net assets are less reliable and increase the information asymmetry between investors. To sum up, fair value information is useful to reduce the information asymmetry between investors.In addition, the high attention of analysts, reasonable ownership concentration of the second to the tenth largest shareholders, state-owned holding, increasing of executive pay, listed in multiple markets, maintaining a higher proportion of independent directors, high quality of the audit and corporate governance index can effectively improve the information quality and financial transparency of listed companies, and reduce the information asymmetry between the investors. Improving the comprehensive level of corporate governance for listed companies in China is beneficial for implementing the fair value measurement standards, it is also beneficial for investors and market participants to use fair value information to make economic decisions.To sum up, in order to improve the application of fair value, the quality of accounting information, and the transparency of capital market,this article suggests that Chinese listed companies should pay more attention to the application of fair value measurement. At the same time, they should strictly follow the requirements of the fair value measurement standards in disclosing level 3 inputs. In order to help investors to make better use of fair value information to make decisions, to realize the effective utilization of resources and configuration, standard-setting institutions should further strengthen the supervision of disclosure of the level 3 inputs, and gradually increase the strength of corporate governance to increase comprehensive management level of the companies.