Fair Value Changes On Company Performance And Stock Price Fluctuations

Fair value refers to the current transaction prices of assets and liabilities. In accounting methods, it means the disclosure of assets and liabilities is based on the market value or present value of future cash flows. Studies have show that fair values provide more relevant measures of assets, liabilities and earnings than historical costs. Many countries have brought fair value accounting method in their accounting standards and China has also introduced fair value accounting in the new accounting standards which was implement in 2007. However, after the U.S. sub-prime mortgage crisis, many critics have argued that fair value accounting has significantly contributed to the financial crisis or, at least, exacerbated its severity. Under the pressure of the financial crisis, after a careful and thorough review of the practice, the United States Financial Accounting Standards Board and the International Accounting Standards Board both decided to justify the rules. The debate on fair value accounting is mainly focused on whether fair value accounting is pro-cyclical and exacerbated the spread of the financial crisis. There are many studies on fair value accounting and the financial crisis, but empirical research is still rare. In this paper, we examined the role of fair value accounting on the performance of listed companies and stock price volatility in China's A share market based on the implement of the new accounting standards, using theoretical analysis, descriptive data, case study as well as empirical evidence. What's more, we also discussed the volatility contagion effect under cross-shareholdings and try to give some empirical evidence on the role of fair value accounting in the recent financial crisis. We found that, earnings become more volatile under fair value accounting. What's more, stock price will be impacted by the increased volatility. That is, investors require risk premium on the extra profit volatility fair value brought. Considering cross-shareholding between listed companies, the extra volatility and share price moving will accelerate the contagion of financial crisis. At the same time, the changing of net asset value impacted by available for sale financial assets' fair value will affect investors'judgment on share prices and their transaction decision, thus aggravating asset price volatility.