Fair Value Accounting,Economic Fluctuations And Market Reactions

The 2008 financial crisis makes the fair value controversial, and the disputes mainly have two points:one is whether the implementations of FVA caused the information’quality declining during the crisis, and the other is whether fair value is pro-cyclical. Since the introduction of fair value in 2007 and the issue of "the Fair Value Measurement (Draft)" in 2012, China formally issued CAS 39-Fair Value Measurement in 2014.With FVA in our country converging with the international standards, the Application of FVA and the Financial Risk Prevention causes the attention from all circles, and the implications of FVA in capital market becomes a worldwide research area. The imperfection of capital market, lower level of market participation and relatively backward valuation technology, all of these factors make the market reactions of China different from western countries’. So the research of FVA against the background of our country’s capital market has practical significance.So this article is based on the data of the public listed companies which have implemented FVA in Shanghai’Securities Exchange and Shenzhen’Securities Exchange from 2007 to 2013. We analyzes whether the shares’explanatory power of earnings per share based-on FVA enhances, then makes a further study on FVA’s value relevance during economy downward and upward. Based on the value relevance of fair value research, we investigated whether FVA has pro-cyclical effect and whether the pro-cyclical effect exists asymmetry problem. According to the degree of the fair value measurement, enterprises’earning can be divided into three types, including historical cost measuring earning, mixed measuring earning, comprehensive earning.Study found that three kinds of enterprises’earnings have different explanatory powers on shares, and the degree of explanatory powers on shares improve with the history cost earnings, mixed measuring earnings and comprehensive income in turn. For non-financial institutions economic downturn does not detract from the value relevance of the fair value, although comprehensive income per stock in economic downward with a drop in share price explanatory power, but mixed measuring earnings per share in the economic downward improves even bigger. But for the financial enterprises, the study found that under economic downturn and economic upturn FVA’s explanatory power is affected obviously, so FVA caused the impact of the financial crisis for the financial companies significantly larger. At the same time we also investigated FVA"s earnings volatility and market reaction, and the study found that the three kinds of earnings volatilities(historical cost measurement earnings volatility, mixed measurement earnings volatility, comprehensive income volatility) and market risk were positively correlated, that is, the fair value earnings volatility had reactions on the stock market. So FVA has pro-cyclical effect and there is asymmetry problem with pro-cyclical effect. For non-financial enterprises, fair value pro-cyclical effect is stronger in economic upward than in the economic downward, while for the financial firms FVA’s pro-cyclical effect is stronger in economic downward than in the economic upward.In this paper, the research is includes six sections:The first chapter is introduction, which mainly introduce the selected topic’ background and significance, thesis structure, the technical route, and puts forward the innovation of this article. The second chapter is literature review at home and abroad. We reviewed respectively about the value relevance of FVA, the pro-cyclical effect of the FVA, earnings’fluctuation of FVA, which lay the foundation for the subsequent research. The third chapter for the study is the theoretical analysis and hypothesis. First analyzes the value relevance of FVA theory, market efficiency theory, and put forward the hypothesis according to the related theory. Then based on the FVA’s pro-cyclical effect theory and fair value fluctuations theory, the study investigates whether there is pro-cyclical effect and pro-cyclical asymmetry problem with FVA. The fourth chapter is the research design and sample selection. Refer to the related literature’s model and combined with the relevant variables in our research, we design the model in this paper. The fifth chapter is empirical analysis.In this section, we investigate the explanatory power of the enterprises’ three types earnings, then makes a further study of FVA’s explanatory power under economic downturn and economic upturn, the pro-cyclical effect and pro-cyclical asymmetry problem with FVA. Chapter six of this paper summarizes the final conclusions, and put forward the shortcomings and future outlook in this paper.The contributions of this paper mainly has two points, (1) The existing research of FVA’s value relevance about China listed companies isn’t further divided into historical cost measurement earnings, mixed measuring earnings and comprehensive earnings to make a detailed research. There is a lack of share explanatory power during economic downward and upward.(2) Many researchers studied the pro-cyclical effect of FVA, but lack of research on fair value cycle asymmetry problem. Based on economic ascending and descending period of FVA, this paper can help regulators and standards setters make a targeted formulation about the FVA, and this is the place where the paper is more important.This article also has some shortcomings, (1) Based-on the trend of the GDP growth rate trend graph, this paper divides the sample into economic downturn group and economic upturn group, which is too sketchy. Especially in 2013, compared to the GDP growth rate in 2012, there is only a very small fluctuations. Market conditions actually can be further divided into economic stability, which may be more reasonable. (2) Due to earnings involved the calculation of standard deviation, this article selects two years as a rolling period, so actually we can only obtain the data from 2009 onwards, that is, the study can only get five years of data. The sample company must have fair value change with profit and loss and other comprehensive income, and therefore lessen the sample size.Aiming at the shortcomings of the paper, we can undertake efforts through the following aspects:(1) In this paper, the economic cycle is divided into economic upturn and economic downward, which actually can be further divided into three stages, that is, economic upturn and economic downward and economic stability. (2) In this paper, we only use the price model, so we can also use the revenue model to investigate FVA’s value relevance; the study of FVA’s pro-cyclical only selected the stock yield standard deviations as substitution variables of market risk, we can also choose Beta as a substitute of market risk variables for further study.