The effect of fair value accounting on the performance evaluation role of earnings
Siqi Li, Department Chair, Professor of Accounting, Ernst & Young Faculty Research Fellow
Mark DeFond, Jinshuai Hu, Mingyi Hung, Siqi Li, The effect of fair value accounting on the performance evaluation role of earnings, Journal of Accounting and Economics, Volume 70, Issues 2–3, 2020, 101341, ISSN 0165-4101, https://doi.org/10.1016/j.jacceco.2020.101341.
Abstract
We study the effect of fair value accounting on the association between net income and cash pay following the 2005 worldwide adoption of IFRS. We find that, while IFRS's non-fair-value provisions are associated with an increase in this association, its fair value provisions are associated with a decrease in this association. Overall, we contribute to the literature on the usefulness of fair value accounting by presenting evidence that fair value accounting is associated with a decrease in this association. Under assumptions that we detail and subject to caveats that we detail, our evidence suggests that fair value accounting may reduce the usefulness of earnings in evaluating management performance.