Fair value accounting and earnings variability: Evidence from global real estate firms

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Abstract

This study explores the relationship between earnings quality and fair value accounting beyond market-based measures, financial industry-related settings, and US firms. It analyzes the effect of discretionary fair value measurement of investment properties and earnings distribution using a sample of 2,658 observations between 2006 and 2017 from real estate firms in 36 countries. The results indicate that applying the fair value model to investment properties subject to International Financial Reporting Standards (IFRS) increases earnings variability and decreases earnings smoothness. These links are found for a fair value model dummy and incrementally for investment property fair values. Managers do not seem to exploit their discretion in lower-level fair value measurements to smooth out further earnings fluctuations. Among fair value model appliers, earnings variability appears to further increase, and earnings smoothness appears to further decrease, in the case of strong investor protection and real estate sector-specific institutional governance.

Keywords: Fair Value, Real Estate, International Accounting Standard 40, Earnings Variability, Earnings Smoothness, Governance

Authors’ individual contribution: The Author is responsible for all the contributions to the paper according to CRediT (Contributor Roles Taxonomy) standards.

Declaration of conflicting interests: The Author declares that there is no conflict of interest.

JEL Classification: G34, L85, M41, M48

Received: 24.03.2023
Accepted: 04.08.2023
Published online: 08.08.2023

How to cite this paper: Thesing, J. (2023). Fair value accounting and earnings variability: Evidence from global real estate firms [Special issue]. Corporate Ownership & Control, 20(3), 359–374. https://doi.org/10.22495/cocv20i3siart11