Fair Value And Information Risk

Since fair value became a measurement of accounting, there was a hot debate about it. As the global financial crisis broke out in2008, many scholars paid more attentions on fair value, and majority papers about accounting researching for it. Intend to reflect matters of economic and business, the amount of each accounting elements must be determined by accountants. That is, each factor of accounting should be given a certain amount of money by using the accounting measurement basis. The fair value measurement attributes aims to reflect the value that knowledgeable market participants willing to exchange the assets or liabilities in arm’s length transaction. However, market transactions are not subject at all times. When the transaction information cannot be obtained in an active market, the fair value measurement had to settle for other input parameters to value the assets or liabilities. Thus, three levels of fair value measurement attribute appear. The first level of fair value measurement takes inputs from active market directly, nearly management estimates exist. The second level of fair value measurement incorporates some management estimates, while the third level of fair value measurement is based on the valuation managements entirely. Therefore, the transparency of the three levels of the fair value is different. Transparency of the first is the highest, and the transparency of the third level is the lowest. Accounting standards explicitly require that the first level should be selected first.With the development of China’s capital market, decision-making of Chinese investors rely more and more on company information which is collected from a variety of ways. As a part of the company information, accounting information occupies an important position in investor decisions. Since the transparency of three levels of the fair value is different. When the asymmetry of information occurs, investors face different risks using different accounting information. So, this paper wants to study the different risks in accounting information, especially for financial instruments in financial industry. Samples of this paper come from Chinese financial industry. Because the new accounting standards set to implementation in2007, time of observations distribute from2007to2012. After analyzing those observations, we find that information risk of the three levels of fair value measurements increases monotonously. That means the information risk of Level I is higher than the information risk of Level II, and the information risk of Level II is higher than the information risk of Level III. Although all companies operate in an identical capital market, the information environment varies in them. If the quality of information environment is high, inventors could get other information from outside to make up the information they will use to make decisions. Thus they will face lower uncertainty when they use accounting information as the parameters in valuation. Using analyst followings as indicator variable, further research in this article finds that the information risk gaps between Level Ⅲ and other Levels of samples in a poor information environment is higher than the gaps of samples in a good information environment. This indicates that the information environment affect the information risk of fair value. Improving information environment of companies reduces the risk of tertiary level that investors faced.