ECONOMIC CONSEQUENCES OF FAIR VALUE ACCOUNTING: A REVIEW OF RECENT LITERATURE

Abstract

The purposes of this study are two-fold. First, we draw from the findings of prior literature reviews and theoretical studies to develop two hypotheses geared towards explicating the economic consequences of fair valuation. We respectively refer to these hypotheses as the business model hypothesis and the hardness hypothesis. Second, we test these hypotheses by reviewing previous research from the top three journals in the field. We find that the relationship between fair valuation and the usefulness of accounting information varies as a function of the business model employed by the entity under consideration. We also find that the effects of fair valuation are contingent upon differences in the hardness with which relevant assets and/or liabilities are measured. Overall, our results suggest that differences in an entity's business model and the hardness associated with fair value accounting measurement have measurable effects both on valuation and contracting usefulness of accounting information.