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

discretion is likely to be opportunistic. Khurana and Kim (2003) suggest that, among US
financial institutions, fair value is more value-relevant when objective market-determined
fair value measures are available. In a related study, Yao, Percy, and Hu (2015) assess the
association between the reliability of fair value estimates and audit fees among Australian

companies and find that auditors react positively to the service provided by an independent
valuer or appraiser in the form of charging lower audit fees, as auditors perceive the
reliability of fair value amounts to be increasing and the prevalence of agency issues to

4
be decreasing. Similarly, Lin and Wang (2019) examines audit fees in Taiwan subsequent
to the adoption of IAS 40 and find that when companies are required to disclose the fair
value of investment properties, companies that employ external appraisers exhibit a lower
increase in audit fees if they choose the cost model.
Prior research also covers the consequences of fair value accounting with a focus on

the real estate industry. Dietrich, Harris, and Muller (2000), looking at fair value estimates
for UK investment property, find that managers choose from permissible accounting
methods to report higher earnings and boost reported fair values prior to issuing new debt.

Furthermore, they show that the reliability of fair value estimates is stronger among firms
that hire external appraisers and Big 6 auditors. Extending the work of Dietrich et al. (2000),
Muller and Riedl (2002) find that information asymmetry is lower among firms that use
external appraisers than among those that employ internal appraisers. Muller, Riedl,
and Sellhorn (2011) reveal that IAS 40 reduces information asymmetry among Europe-

an firms confronted with mandatory adoption. However, these firms still exhibit higher
information asymmetry than those that adopted it voluntarily due to the lower reliability
of fair values among mandatory adopters. Finally, Liang and Riedl (2014) find that the fair

value model bolsters analysts’ ability to forecast net asset values but hinders their ability
to forecast net income, as unrealized fair value gains/losses are included in net income.
In a related study, Ghosh, Liang, and Petrova (2020) show that disclosing net asset values
boosts transparency in financial reporting, which manifests in the form of higher pricing
efficiency and liquidity. However, using a sample of Chinese real estate companies, Hsu,

Wu, and Sbaraglia (2020) find that reporting investment properties under the fair value

4 Barth and Clinch (1998), however, do not find a difference in value relevance between internal and
external appraisals.

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