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 318 Due to two reasons above, we anticipate that the income in firms with investment properties measured by the fair value model can provide more relevant information than firms with investment properties measured by the cost model to predict an entity’s future performance. We form H1 as the following: H1: Incomes in firms with investment properties valued using the fair value model have higher predictive ability for future earnings than incomes in firms with investment properties under the cost model. However, we need to exercise caution, as the possibility that fair value reporting for investment properties increases managerial manipulation and facilitates bad-news- hoarding behaviors, and thus decreases the predictability of future earnings, exists. Ball (2012) documents that mark-to-market (MTM) accounting increases information asymmetry relative to historical cost accounting. In addition, MTM gains and losses are difficult to forecast. Liang and Riedl (2014) find lower earnings forecast accuracy for U.K. investment property firms that report earnings using the fair value model of IFRS, in which unrealized fair value gains and losses are included in net income. Next, for firms with investment properties valued using the fair value model, we expect that the predictability of earnings for future earnings increases with the amount of accumulated unrealized fair value gains (losses). Changes in the fair values of assets should be able to predict future earnings, if measures of fair value are reliable for valuing assets (Barth, 2000). Schipper (2007) documents that investors react more strongly to amounts recognized in financial statements than amounts disclosed in financial reports, because investors may consider the amounts recognized in financial statements as more reliable. Utilizing U.S. banking data from 1993 to 2008, Bratten et al. (2012) find that unrealized fair value gains and losses enhance the ability of earnings to predict to future earnings. Similarly, using a sample of banks from 1994 to 2008, Evans et al. (2014) evaluate the association between unrealized fair value gains and losses of investment securities and future earnings. They also provide evidence that the accumulated unrealized fair value gains and losses for investment securities of banks are associated with the future reported earnings of banks. This suggests that accumulated changes in the fair value of investment securities can affect the predictability of earnings for future performance. Thus, we form H2 as follows: