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

Predicting Future Performance Using Fair Value versus Historical Cost: Evidence from Investment Property 314 markets. 2 In addition, investment properties are the primary operating assets for real estate firms, and their fair values are observable in relatively liquid markets compared to other industries. This allows us to examine if financial results reported by real estate investment firms using fair value have a higher predictive value than results reported using historical cost. We investigate whether reporting investment property using fair value provides incremental predictive ability for future performance beyond historical cost. Using a sample of real estate firms listed on Chinese stock exchanges from the period 2007 up to and including 2014, we find that incomes in firms reporting investment properties using fair value have higher predictive ability for future income than incomes in firms using historical cost. This study also demonstrates that the predictability of earnings for future incomes under the fair value model increases with accumulated changes in fair value gains and losses of investment properties. The results indicate that recognizing changes in the fair values of investment properties in income statements can augment the predictability of a firm's future income. This study contributes to the literature in two ways. First, this study adds to existing research by investigating the effect that the fair value model has on the predictive value of income in real estate, as opposed to the financial services industry. Second, this study also contributes to literature on the adoption of IAS 40 in emerging markets, such as China, where firms are less likely to adopt fair value measurements when fair value information involves high cost and complexity which make it difficult to obtain the fair value of assets. Leuz, Nanda, and Wysocki (2003) question if IFRS can be effectively applied in the same way across different countries. Our study offers important policy implications for standard setters and regulators governing emerging markets. The remainder of this paper is organized as the following: section 2 discusses the accounting and institutional background, section 3 reviews prior research and develops testable hypotheses, section 4 discusses sample selection and research design, section 5 reports the empirical results, section 6 discusses the additional analyses, and section 7 is the conclusion. 2 This is equivalent to the Level 2 fair-valued assets, according to the SFAS 157. We discuss this in detail in the hypotheses development section.