Illiquid Markets and the Value Relevance of Accounting Information: Fair Value Measurements

Abstract

The value of information incorporated by fair value measurements into financial statements, as compared to that provided by historical cost accounting, is considered to constitute one of its vital advantages -- such value having attributes of complete and accurate information.

However, problems identified with fair value accounting include:

-- The fact that in illiquid markets, trading by managers could influence traded -- as well as quoted prices, hence allowing them to manipulate fair value estimates;

-- Tendency for fair value accounting to increase opportunities for manipulation when "mark-to-model" accounting is employed to simulate market prices.

This study investigates the value and relevance of accounting information in certain selected jurisdictions -- particularly those with illiquid markets. In so doing, it also seeks to address questions relating to the reluctance of certain jurisdictions to fully embrace fair value accounting and whether such jurisdictions are justified in their actions.

Keywords: Efficient Markets Hypothesis, value relevance, illiquid markets, audits, fair values