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The Effect of the Fair Value Reporting Model on Analyst Forecast Properties: Evidence from Real Estate
Firms

1. Introduction

Prior studies indicate that the fair value and historical cost models have differential
effects on capital market participants (Benston, 2008; Blankespoor, Linsmeier, Petroni, and

Shakespeare, 2013; Bleck and Liu, 2007; Cantrell, McInnis, and Yust, 2014; Landsman,
2007). In line with this view, Liang and Riedl (2014) show that, relative to the historical
cost model, the fair value model reduces analysts’ ability to forecast earnings due to its
incorporation of a higher number of less-correlated items into earnings, which raises the

complexity of the prediction task. This finding raises further questions (which have yet to
be covered in prior research) about whether these two reporting models exhibit differential
effects on other analyst forecast properties (e.g., forecast dispersion) and whether these
effects are long-lasting. Motivated by this gap in the literature, we extend prior works and

seek to answer these questions.
We examine real estate firms across the US and the UK from 2002 to 2014,
1
leveraging three advantages identified by Liang and Riedl (2014). First, the difference
between the two countries in accounting standards for investment properties allows for

a comparison of the fair value and historical cost models. More specifically, while UK
firms report investment properties at fair value under both UK domestic standards and
International Financial Reporting Standards (IFRS), US firms report them at historical cost
under US Generally Accepted Accounting Principles (GAAP), with financial statements

rarely disclosing fair value estimates. Moreover, the UK’s adoption of IFRS in 2005
facilitates further analysis of whether unrealized fair value gains/losses not passing through
net income (under UK domestic standards: the partial fair value model) or passing through
net income (under IFRS: the full fair value model) has a differential effect on analyst

behavior. Second, compared to a sample of financial institutions that are similarly exposed
to fair value accounting, it is easier in the real estate industry to disentangle confounding
effects that may bias the effect of fair value accounting; this difference is attributable to
the fact that financial institutions are subject to substantial regulations and possess more

heterogeneous operating assets. Third, the US and UK real estate industries are similar and

1 These firms invest in real estate to earn rental revenues and/or capital appreciation.

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