Study On Earning Predictive Ability Of Fair Value And The Influence Factors

Fair value measurement is not only the core content of China’s accountingstandards but also an important sign of China’s accounting standards converging withIFRS. Financial Accounting Standards Board of US comprehensively explains thequalitative characteristics of accounting information in SFAC NO.2, in whichdecision usefulness quality is the highest level. Fair value measurement isfuture-oriented with the decision usefulness, which will help investors to predictfuture earnings. However, due to the fairness, dynamism and estimation of the fairvalue measurement, the mamagers will use it to earnings management in practice, inorder to obtain some personal gains. So the reliability of fair vlue information will bereduced, thus affecting the earnings predictive ability of fair value. Fortunately, theearnings management behavior is restricted by debt contract, the process ofmarketalization and corporate governance. Therefore after using fair valuemeasurement in China, whether the extent to which fair values are used in financialreports is related to the ability of earnings to predict future earnings providing a usefuldecision-making information, and whether it is influenced by debt contract, process ofmarketalization and corporate governance, both are the important issues of China’saccounting reform to be studied.This paper takes the accounting objective theory, measurement perspective, cleansurplus theory, comprehensive income, asset-liability view and the accountinginformation quality characteristic theory into the analysis of the earnings predictiveability of fair value. And from the perspective of influencing the reliability of fairvalue, this paper takes debt contract theory and principal-agent theory into theanalysis of how debt contract, process of marketalization and corporate governanceaffect the earnings predictiveability of fair value. Based on this through the balancesheet approach and income statement approach to capture the extent to which fair valuesare adopted in each financial reports, this paper constructs two multiple regressionmodels to examine whether the extent to which fair values are adopted in financialreports is related to the ability of earnings to predict future earnings, using a sample ofA-share listed companies over2009-2012in china which using fair valuemeasurement. And grouping the whole sample into two samples according to themedian of borrowing proportion, the median of marketalization index and the medianof comprehensive factor score of corporate governance respectively, this paper constructs three pairs of grouped regression models to examine whether the earningspredictive ability of fair value is influenced by debt contract, process ofmarketalization and corporate governance. The research results show that the greaterproportion of financial reports at fair value is, the stonger the earnings predictability offair value is, profits or losses of fair value is significantly positively related to futureearings, and other comprehensive income is not relevant with future earnings. Itbasically shows that fair value has the earing predictability, which can provide usefulinformation for decision making of investors and other stakeholders. Debt covenants,market process and corporate governance have a significant impact on the earningspredictability of fair value. The lower proportion of borrowers, the higher the marketprocess, the higher the level of corporate governance is, the stronger the degree ofcorrelation between the extent to which fair values are adopted in financial reports andthe earing predictability, and the stronger earing predictability of the gain or loss offair value are. But only at high level of market process, other comprehensive incomehas the earnings predictability. Based on the above, in order to improve the earningspredictability of the fair value, the paper puts forward the following policysuggestions: to perfect the fair value measurement standards, to accelerate the processof marketization, to improve the corporate interior government structure, to strengthenthe external supervision and so on.