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

317 NTU Management Review Vol. 30 No. 2 Aug. 2020 fixed assets are related to future changes in operating performance, by measuring realized operating income over a one- and two-year window after the year of revaluation. They find that an upward revaluation of assets is positively associated with changes in the firm’s future performance. However, they also report that the positive association between the revaluation of tangible assets and future performance is weaker for cross-listed firms, highly leveraged firms, and volatile time periods. In contrast, using a sample of Brazilian-listed firms, Lopes and Walker (2012) find a negative association between the revaluation of fixed assets and the firm’s future operating earnings, suggesting that the use of the fair value model does not increase the predictive value of earnings. However, they also show that the decision to revalue is negatively associated with the firm’s score on the Brazilian Corporate Governance Index, and positively associated with debt and illiquidity. These results indicate that the asset revaluations were performed primarily for opportunistic reasons. 3.2 Hypotheses Development In this study, we argue that using the fair value model for investment property may increase the predictive value of earnings over the cost model in China for two reasons. First, we expect that investment properties measured using the fair value model will incorporate more price-relevant information than historical cost information in financial statements. Fair value measures could possess predictive value for future performance because fair value measurements of assets can be realized by settlement or sale (Evans et al., 2014). Fair value accounting incorporates more price-relevant information than historical cost information in financial statements. Using a sample of Chinese-listed firms, Liu and Liu (2007) find that earnings based on fair value accounting are more value- relevant than earnings based on historical cost accounting. Second, under CAS 3, an entity is allowed to use the fair value method if and only if: (1) the local property market is active and (2) the fair value of an entity’s investment property can be estimated reliably through values and other information of the same, or a similar, category of properties in an active market [CAS 3.10]. Under CAS 3, Chinese firms are not encouraged to use model estimates when no appropriate market quotes are available. Indeed, CAS 3 is more prudential, conservative, and restrictive regarding the fair value model. Riedl and Serafeim (2011) argue that when fair value is more reliable, it can provide fewer opportunities for earnings management because it decreases the information asymmetry between financial statement preparers and external users.