Recognition versus disclosure: evidence from fair value of investment property

Research output: Contribution to journalArticle

15 Citations (Scopus)

Abstract

The application of International Accounting Standard 40, Investment Property, in the European Union created a unique setting to study the implications of a decision to recognize versus disclose financial statements’ items, because in this setting recognized and disclosed investment-property-related amounts share a common measurement base, i.e., fair value. I use this setting to (1) explore a firm’s choice to recognize versus disclose fair values of investment properties, (2) test whether recognized and disclosed amounts are valued equally by investors, and (3) determine whether these amounts exhibit equivalent associations with future financial outcomes. To correct for self-selection concerns and assure I compare analogous amounts, I develop a selection model and construct investment-property-related amounts that differ only in whether their components are recognized or disclosed. I find that (1) contractual and asset-pricing incentives help to explain the recognition versus disclosure choice, (2) investors place smaller valuation weights on disclosed amounts, and (3) recognized and disclosed amounts exhibit statistically equivalent associations with future changes in net rental income and cash flows from operations. Taken together, the evidence suggests that managers are opportunistic in making the recognition versus disclosure choice and that even when recognized and disclosed amounts share an equivalent measurement base and are equally relevant for future financial outcomes, investors weight disclosed information less heavily in determining a firm’s value.
Original languageEnglish
Article number47
Pages (from-to)1457
Number of pages1503
JournalReview of Accounting Studies
Volume20
Issue number4
Publication statusPublished - Dec 14 2015

Fingerprint

Disclosure
Fair value
Investors
European Union
International accounting standards
Firm value
Self-selection
Selection model
Asset pricing
Income
Incentives
Cash flow
Financial statements
Managers

Cite this

Recognition versus disclosure: evidence from fair value of investment property. / Israeli, Doron.

In: Review of Accounting Studies, Vol. 20, No. 4, 47, 14.12.2015, p. 1457.

Research output: Contribution to journalArticle

@article{eb28f342bb14466bacd810017d15c608,
title = "Recognition versus disclosure: evidence from fair value of investment property",
abstract = "The application of International Accounting Standard 40, Investment Property, in the European Union created a unique setting to study the implications of a decision to recognize versus disclose financial statements’ items, because in this setting recognized and disclosed investment-property-related amounts share a common measurement base, i.e., fair value. I use this setting to (1) explore a firm’s choice to recognize versus disclose fair values of investment properties, (2) test whether recognized and disclosed amounts are valued equally by investors, and (3) determine whether these amounts exhibit equivalent associations with future financial outcomes. To correct for self-selection concerns and assure I compare analogous amounts, I develop a selection model and construct investment-property-related amounts that differ only in whether their components are recognized or disclosed. I find that (1) contractual and asset-pricing incentives help to explain the recognition versus disclosure choice, (2) investors place smaller valuation weights on disclosed amounts, and (3) recognized and disclosed amounts exhibit statistically equivalent associations with future changes in net rental income and cash flows from operations. Taken together, the evidence suggests that managers are opportunistic in making the recognition versus disclosure choice and that even when recognized and disclosed amounts share an equivalent measurement base and are equally relevant for future financial outcomes, investors weight disclosed information less heavily in determining a firm’s value.",
author = "Doron Israeli",
year = "2015",
month = "12",
day = "14",
language = "English",
volume = "20",
pages = "1457",
journal = "Review of Accounting Studies",
issn = "1380-6653",
publisher = "Springer New York",
number = "4",

}

TY - JOUR

T1 - Recognition versus disclosure: evidence from fair value of investment property

AU - Israeli, Doron

PY - 2015/12/14

Y1 - 2015/12/14

N2 - The application of International Accounting Standard 40, Investment Property, in the European Union created a unique setting to study the implications of a decision to recognize versus disclose financial statements’ items, because in this setting recognized and disclosed investment-property-related amounts share a common measurement base, i.e., fair value. I use this setting to (1) explore a firm’s choice to recognize versus disclose fair values of investment properties, (2) test whether recognized and disclosed amounts are valued equally by investors, and (3) determine whether these amounts exhibit equivalent associations with future financial outcomes. To correct for self-selection concerns and assure I compare analogous amounts, I develop a selection model and construct investment-property-related amounts that differ only in whether their components are recognized or disclosed. I find that (1) contractual and asset-pricing incentives help to explain the recognition versus disclosure choice, (2) investors place smaller valuation weights on disclosed amounts, and (3) recognized and disclosed amounts exhibit statistically equivalent associations with future changes in net rental income and cash flows from operations. Taken together, the evidence suggests that managers are opportunistic in making the recognition versus disclosure choice and that even when recognized and disclosed amounts share an equivalent measurement base and are equally relevant for future financial outcomes, investors weight disclosed information less heavily in determining a firm’s value.

AB - The application of International Accounting Standard 40, Investment Property, in the European Union created a unique setting to study the implications of a decision to recognize versus disclose financial statements’ items, because in this setting recognized and disclosed investment-property-related amounts share a common measurement base, i.e., fair value. I use this setting to (1) explore a firm’s choice to recognize versus disclose fair values of investment properties, (2) test whether recognized and disclosed amounts are valued equally by investors, and (3) determine whether these amounts exhibit equivalent associations with future financial outcomes. To correct for self-selection concerns and assure I compare analogous amounts, I develop a selection model and construct investment-property-related amounts that differ only in whether their components are recognized or disclosed. I find that (1) contractual and asset-pricing incentives help to explain the recognition versus disclosure choice, (2) investors place smaller valuation weights on disclosed amounts, and (3) recognized and disclosed amounts exhibit statistically equivalent associations with future changes in net rental income and cash flows from operations. Taken together, the evidence suggests that managers are opportunistic in making the recognition versus disclosure choice and that even when recognized and disclosed amounts share an equivalent measurement base and are equally relevant for future financial outcomes, investors weight disclosed information less heavily in determining a firm’s value.

M3 - Article

VL - 20

SP - 1457

JO - Review of Accounting Studies

JF - Review of Accounting Studies

SN - 1380-6653

IS - 4

M1 - 47

ER -