Research On The Investment Relevance Of Fair Value Accounting

In 2006, in order to convergence with the international accounting standards, China announced her new set of financial accounting standards, and in 2007 carries on the comprehensive promotion and application formally. Under the rules of fair value, the changes of asset fair value caused by asset prices fluctuation will affect the enterprise's net assets, and then influence the enterprise financial affairs condition. This influence is shown in two aspects: capital cost and financing ability. The fair value accounting requires using current value on the measurement of assets and liabilities. Asset prices dropped, the value of the mortgaged property has shrunk, enterprise credit level is weakened, and solvency is reduced, external financing costs rise, investment and output decreased. Conversely, asset prices inflate lead to external financing cost reduction, enterprise investment and output increased.A primary aim of this paper is to research how much influence the enterprise investment by application of the attribute- the fair value in China. To answer this question distinctly and exactly, it is probed into the theory research and positive analysis in this paper. Firstly, Based on the current status of international and domestic fair value research, this paper expounds the theoretical basis and the fair value measurement premise, the fair value and enterprise investment related concept, the enterprise investment and external financing relationship. Secondly, this paper discussed the affect of the fair value for enterprise investment from two aspects. On one hand, the fair value specific standards promote the enterprise investment, on the other hand, the application of the fair value rules amplifies enterprises' financing ability and the investing behaviors; Finally, this paper uses Vogt(1994) enterprise investment model involved the asset price dynamics variable and the changes in the fair value variable respectively, to examine the correlations between the asset price changes and the enterprise investment, the fair value changes and the enterprise investment with different financial constraints. And on this basis this paper proposes the corresponding counter measures. The empirical tests show that a highly positive correlation existed between the fluctuation of assets fair value and firms'investment. The result also show that the effect of asset fair value fluctuations will be more significant to the firms whose financing ability is high than the ones whose is low.By the channel of balance sheet, asset price fluctuations have a greater impact on corporate investment behavior since the new accounting rules have been carried out. At last two policy implications are induced as follows: Firstly, firms should be allowed to set buffer capital or reserves and required to improve their information disclosure procedures more transparent to weaken the effect of fair value accounting rule on balance sheet with asset price volatility; Secondly, for the actual financial needs from private economic agents will determine the effectiveness of expansionary policies it is necessary to take the effect of balance sheet into the government's economic policy framework.