Study On The Economic Consequences Of Fair Value Application In The Listed Company

On February15th,2006, the Ministry of Finance issued the new accountingstandards, and required the listed company to implement first from January1,2007.In the same time, encouraged other companies to implement the new accountingstandards and all large and medium state-owned enterprises must implement the newaccounting standards in the end of2008. The implementation of new accountingstandards marks Chinese accounting standards with international accountingstandards convergence; it is also an important component of the development ofChina’s market economy. In the new accounting standards, the concept of fair value isintroduced appropriately and prudently, which became one of the most shiningfeatures of the new guidelines. There are18specific criteria related to fair value.Since the implementation of new guidelines in the listed company,"what is theeconomic consequences of fair value application" has become a important questionfor academics and practitioners. Judging from the current research at home andabroad, the majority of scholars demonstrates and test the effects of fair valueapplication from the angle of value-relevance, but they ignores the impact of fairvalue measurement on the contract efficiency. Based on the point of Holthausen,Watts, compared with the relevance of the value from the capital market, the researchon the effect of accounting policies changes for lease enforcement can provide moredirect and more important evidence for the economic consequences of accountingstandards. Whether the fair value will affect the debt contracts or not? This will be thepurpose of this paper. Therefore, first it introduces the background and significance ofthe study, the research at home and abroad, and related theoretical foundation, andthen summarizes and sorts out the development process of fair value in our country aswell as in our application status. On top of that, based on the data of all listedcompanies in Shanghai and Shenzhen Stock Exchange from2007to2012, thisresearch will study the debt contract, then combine with the theoretical analysis thatreferred, to make assumption model, Empirical data and regression analysis. Empirical results show that: there are negative correlation between profit and lossarising from fair value changes and company’s ability to obtain short-term loan; andthere is correlation between profit and loss arising from fair value changes andcompany’s ability to obtain long-term loan, but the correlation is not significant. Thisshows that the fair value had an impact on debt contracts between enterprise andbank.However, due to the close correlation between assets which are measured by fairvalue and the stock market, stock market volatility resulted in the volatility of fairvalue of these assets. It shows that companies are not certain about the prediction offuture earnings and cash flow, this makes it is possible that corporate managersfalsifies the profit. Enterprise managers sometimes make use of fair valuemeasurements for their own purposes to obtain the necessary funding. Therefore werecommended that banks should take strict precautions against the credit risk which isbrought by the earning volatility when they are making credit decision.