The Value Relevance of Fair Value Accounting to Market Returns

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Stockholm School of Economics Department of Accounting Thesis within Accounting and Financial Management November 2009

The Value Relevance of Fair Value Accounting to Market Returns Per Lagneby (20225) & Therese Norling (20517)

Abstract This thesis strives to investigate the value relevance of fair value accounting stipulated by the IFRS standards IAS 40 and IAS 41. This is done by using earnings level and change in earnings level as explanatory variables for share returns in the Swedish and Finnish Forestry and Real Estate industries. Aside from investigating on an aggregated level, we also divide the companies based on their business model to study potential differences in value relevance of fair value accounting.

Tutor: Date: Location: Keywords:

Kenth Skogsvik Friday, December 18 Room 348 IFRS, IAS 40, IAS 41, Forestry Industry, Real Estate Industry, Fair Value, Fair Value Change, Value Relevance, Abnormal Earnings, Level of Earnings

Acknowledgments
We would like to thank our tutor Kenth Skogsvik for guidance, useful discussions, good advices and inspiring metaphors.

Table of Contents
1. Introduction ................................................................................................................................................ 1 1.1 1.2 1.3 1.4 1.5 2. Background IFRS ................................................................................................................................. 1 Problem Area ...................................................................................................................................... 2 Aim of study........................................................................................................................................ 2 Limitations .......................................................................................................................................... 3 Dispositions ........................................................................................................................................ 3

Previous Research ...................................................................................................................................... 4 2.1 2.2 Market Based research ....................................................................................................................... 4 Relating Accounting Data to Valuation Models.................................................................................. 6 Linear Information Model .......................................................................................................... 8

2.2.1 2.3 3.

Empirical Test Model .......................................................................................................................... 9

Method ..................................................................................................................................................... 10 3.1 3.2 3.3 3.4 Sample of observations .................................................................................................................... 11 The Dependent Variable ................................................................................................................... 11 The Independent Variable ................................................................................................................ 12 Grouping of observations ................................................................................................................. 13 Classification Criteria ................................................................................................................ 13

3.4.1 3.5 3.6

Time Window.................................................................................................................................... 15 Model specification...
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