Research On The Application Of Fair Value And Investors’ Cognitive Bias

This paper researches the interactive effects of fair value and delisting system through the investment decision-making process of investors in the investment evaluation by the view of investors. It’s called "interactive effect". This paper is based on the investor-protection mechanisms theoretical system of improving information disclosure, also based on the behavioral science theoretical system of cognitive bias.On the one hand, investor-protection mechanisms are very complex. Among them, the information disclosure improvement is one of the main endeavors. In the capital market, one kind of investment information investors rely on is the company’s accounting information. The specification of accounting information is the Accounting Principal. In February of 2006, the Ministry of Finance issued the new Accounting Principal. An important revised point was the implementation of "fair value". The implement of fair value is aimed for improving the quality of accounting information. However, the implementation of fair value instead of historical cost has also been questioned since 2007. On December 18,2007, the China Securities Regulatory Commission proposed one subject that "Prevent listed companies from manipulating the profit by fair value, determinedly" In 2008, the substandard loan crisis of US had questioned the fair value again. Scholars also raised the urgent need to re-examine the improvement in the quality of information and its negative effects of fair value..Based on this, first of all, we discuss that the fair value is the embodiment of the accounting information improvement. It is agreed with the investor-protection mechanisms theoretical system of improving information disclosure. Therefore, the fair value could ease information asymmetry in the capital markets by improving accounting information quality in order to improve investor decision-making. We also think fair value is close to the market-based pricing by discussing the basic characteristics of fair value. It could reflect the market value of assets and liabilities. But its characteristics also make the choice of accounting policy more flexible and more uncertainty in the decision-making of investors. We further find that the fair value is consistent with the decision-useful objective of accounting information. After analyzing the SFAC No.2 of FASB, we believe that fair value could provide useful information for decision-making, both relevance and reliability. Finally, we review and summarize the past researches to find a large number of theoretical and empirical evidences to support our views.On the other hand, we find investors play an important role in "The fair value improves the level of investors’ investment by improving the quality of accounting information". Because of the development of behavioral sciences, it comes to the accounting and financial fields. The cognitive limitations and biases of human have been widely found in the real behavior of investors. It is said, when making judgments under normal circumstances, it is difficult for investors to fully analyze the related the environment of the judgments. Persons often rely on heuristics to solve problems. It will produce cognitive biases. We argue that the representation bias and the anchoring effects which exist in human thinking could affect investors’decision-making process.Based on this, in the context of our study, we considere the delisting system with discriminatory "ST", which will impact the decisions of investors. First of all, we believe that investors would generate the representative bias because of the cognitive limitations at the stage of information recognition. So they are easy to confuse "ST" with the concept "bad". They would like to consider the logo "ST" of the company’s stocks as the concept of poor quality. Second, the anchoring effect will simplify the analysis process of investors at the stage of information editing. Investors would judge the objectives with their bias. As a result, "ST" is not only the synonym of "poor" in the minds of investors, but also it makes investors’ further assessment with the relevant bias.In summary, fair value would impact the usefulness of accounting information as to the decision-making of investors. In addition, Delisting system would make investors have some bias as to affect the decision-making of investors through its discriminatory "ST". They both begin with investors’ decision-making process and ultimately settle on the decision of investors’ choice. We believe these factors would have interactive effects on the investors’ decisions at the same time. Our study is designed to analyze how the two factors affect on the investors’ investment evaluations and investment choices and how the interaction effects on investors’ decisions through experiments by the investors’ perspective. In our study, we have found:(1) the "ST" of the delisting system indeed causes investors’ prejudice to ST companies, which is common and stable. This shows that persons are easy to look the same with "ST" and "bad" through their cognitive process of "ST" simply; (2)the measurement changes from the history cost to the fair value, investors accept the improvement of non-ST companies better because the value of investors’ choices significantly increased; but little recognition of ST companies; (3)the interactive effects on decision-making of investors of these two factors are that:the fair value makes difference of investors choices between ST and non-ST (bias level) further expanded. We consider it has something to do with the basic characteristics of the fair value. Different from historical cost, fair value is more with subjectivity, virtual, more susceptible to subjective judgments of professionals. All of these bring investors much more uncertainty. When there is much more uncertainty, persons will be more dependent on the mental shortcut, so it is much easier to get cognitive biases. Thus interactive effects of uncertainty cause by the fair value and the bias cause the polarization on the investment choices obviously. Furthermore, the experiment also finds that because of the interactive effects of information improvement and bias, the differences between investors concentrate on evaluations of the "relevance" and "Management credibility". Finally, we have found:(1) the path of fair value effecting investment decision of investors was:fair value improvements→relevance of Information→investor selection; (2) the path of ST identify effecting investment decision of investors was:ST identity bias→relevance of information & reliability of management→investor selection. This is the analysis of interaction path for making sure how the polarization generates.Overall, under the fair value (from the "historical cost" to "fair value"), investors make relatively high evaluation to the company which is thought normal (non-ST companies). They generally recognize the implement of fair value at the non-ST companies. But for the ST companies, they get relatively poor recognition. From some aspects, the fair value will cause the damage to the ST companies.