臺大管理論叢 NTU Management Review VOL.30 NO.2

313 NTU Management Review Vol. 30 No. 2 Aug. 2020 Most of the previous research in this area investigates the predictive ability of fair value earnings for future performance for financial assets. Few studies, however, examine the predictive ability of fair value-based earnings for future income of non-financial assets. This is a critical issue, because the IASB issued International Accounting Standards 40 (IAS 40) investment property , 1 allowing managers to use either fair value or historical cost to report results from investment properties [IAS 40.30] after initial acquired costs. Financial assets are generally undifferentiated and are traded on a public exchange. In contrast, real estate is generally unique and differentiated, and traded privately. Since real estate markets are usually less liquid than financial markets, the fair values of investment properties may be less precise than they are for financial assets, and could impart an adverse effect on predictability. Given the mixed results of previous research on the predictive ability of fair value for future performance, it is crucial to investigate if the reported fair values of investment property are more or less useful than historical cost in predicting future earnings. China provides an informative research setting to explore this issue. The Chinese Accounting Standards (CASs) for Business Enterprises (ASBEs), effective since January 1, 2007, converges substantially with IFRSs. All publicly traded firms on the Chinese stock exchanges are required to measure investment properties in accordance with the Chinese Accounting Standard 3 (CAS 3 hereafter). While CAS 3 is substantially similar to IAS 40, there are two main differences. First, CAS 3 does not require an entity which uses the cost method to also disclose the fair values of investment property in the footnotes. As a result, investors in such firms do not know the fair value of the firm’s real estate. This provision should provide a cleaner test of stock crash risk for investment property being reported under the fair value model versus the cost model. Second, China mandates that firms use historical cost, unless firms are able to provide evidence that fair value estimates of investment properties are reliable. An example of a case where this happens is when investment properties are located in a liquid market, or the fair value estimates of the investment properties are obtained through comparisons with similar properties in liquid 1 IAS 40 investment property is defined as property (land and (or) building) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation, or both [IAS 40.5]. In 2008, IASB also includes properties under construction or development for future use as investment properties.