Research On Value Relevance Of Fair Value Accounting Information

In recent years the fair value accounting has been a frontier and a hot topic in theinternational accounting research. With the continuous development of the capitalmarkets, a large number of derivative financial instruments are in transactions. Theaccounting measurement methods based on the historical costs gradually expose thedrawbacks. In the1980s, more than2000financial institutions fell in trouble, butthe financial report based on historical cost measurement model still showed that theperformance of these institutions were good. So the investors believed that thefinancial report that based on historical cost not only couldn’t send early warningsignals but also would mislead the investors’ judgments. China’s Ministry of Financepromulgated a new system of accounting standards in February2006, and stipulatedthat the new standards should be carried out by listed companies in January1,2007.One of the highlights of the new standards is the extensive introduction of the fairvalue. The main problem that will be discussed in this paper is whether the capitalmarket has a reaction to the introduction of the fair value in the new standard, andwhether the share price of the company is affected. Thus the Fair value accountinginformation has value relevance or not.This paper will test the value relevance of Fair value accounting information bystudying whether the share prices of A-shared companies are related to the profits andlosses on the changes in fair value and available for sale financial assets net changesin fair value or not. On the base of review of related articles and important theoryarticles, the paper will choose the samples of A-shared companies from2009-2011,use price model to research the value relevance of the profits and losses on thechanges in fair value and available for sale financial assets net changes in fair value.The empirical results show that share price is related to the profits and losses on thechanges in fair value and available for sale financial assets net changes in fair value.That is to say, the fair value accounting information will help the investors to knowthe real financial condition of enterprises. Thus they can make more rational andeffective decisions.The main contribution of the paper is the confirmation of the value relevance offair value accounting. Thus the fair value accounting information will help theinvestors to know the real financial condition of enterprises. Thus they can make more rational and effective decisions and provide a strong support to the rule-maker of thenew accounting standards.