Consequences of Voluntary and Mandatory Fair Value Accounting: Evidence Surrounding IFRS Adoption in the EU Real Estate Industry

We examine the causes and consequences of European real estate firms’ decisions to provide investment property fair values prior to the required disclosure of this information under International Financial Reporting Standards (IFRS). We find evidence that investor demand for fair value information—reflected in more dispersed ownership—and a firm’s commitment to transparency increase the likelihood of providing fair values prior to their required provision under International Accounting Standard 40 – Investment Property. We also find that firms not providing these fair values face higher information asymmetry. However, we fail to find that the relatively higher information asymmetry was reduced following mandatory adoption of IFRS. Rather, we find that differences in information asymmetry largely remain. Taken together, this evidence suggests that common adoption of fair value accounting due to the mandatory adoption of IFRS does not necessarily level the informational playing field. Key Terms: Fair value, disclosure, IFRS, information asymmetry Data availability: The data used in this study are available from commercial providers (Thomson Financial Datastream and Worldscope) as well as public sources. Current Date: August 2008 Acknowledgements: We appreciate useful discussion and data assistance from the following persons and their affiliated institutions: Hans Grönloh and Laurens te Beek of EPRA; Simon Mallinson of IPD; and Michael Grupe and George Yungmann of NAREIT. We also thank Francois Brochet, Fabrizio Ferri, Christopher Hossfeld, Erlend Kvaal, Christopher Nobes, Bill Rees, Holly Skaife, and seminar participants at Boston College, Boston University, ESCP-EAP Berlin, Harvard Business School, Ruhr-Universität Bochum, Universität Göttingen, Universität Osnabrück, WHU – Otto Beisheim School of Management, the AAA 2008 Annual Meetings in Anaheim, and the EAA Annual Congress 2008 in Rotterdam for helpful comments. Finally, we thank Susanna Kim and Erika Richardson for research assistance, and James Zeitler for data assistance. Muller acknowledges financial support from the Smeal Faculty Fellowship for 2007-2008. Sellhorn acknowledges financial support from the German Research Foundation (Deutsche Forschungsgemeinschaft—DFG) for 2007. * Corresponding author: Harvard Business School, Morgan Hall 365, Boston, MA 02163 Phone: 617.495.6368, Fax: 617.496.7363, Email: [email protected] Consequences of Voluntary and Mandatory Fair Value Accounting: Evidence Surrounding IFRS Adoption in the EU Real Estate Industry ABSTRACT: We examine the causes and consequences of European real estate firms’ decisions to provide investment property fair values prior to the required disclosure of this information under International Financial Reporting Standards (IFRS). We find evidence that investor demand for fair value information—reflected in more dispersed ownership—and a firm’s commitment to transparency increase the likelihood of providing fair values prior to their required provision under International Accounting Standard 40 – Investment Property. We also find that firms not providing these fair values face higher information asymmetry. However, we fail to find that the relatively higher information asymmetry was reduced following mandatory adoption of IFRS. Rather, we find that differences in information asymmetry largely remain. Taken together, this evidence suggests that common adoption of fair value accounting due to the mandatory adoption of IFRS does not necessarily level the informational playing field. We examine the causes and consequences of European real estate firms’ decisions to provide investment property fair values prior to the required disclosure of this information under International Financial Reporting Standards (IFRS). We find evidence that investor demand for fair value information—reflected in more dispersed ownership—and a firm’s commitment to transparency increase the likelihood of providing fair values prior to their required provision under International Accounting Standard 40 – Investment Property. We also find that firms not providing these fair values face higher information asymmetry. However, we fail to find that the relatively higher information asymmetry was reduced following mandatory adoption of IFRS. Rather, we find that differences in information asymmetry largely remain. Taken together, this evidence suggests that common adoption of fair value accounting due to the mandatory adoption of IFRS does not necessarily level the informational playing field. Key Terms: Fair value, disclosure, IFRS, information asymmetry