iBusiness, 2010, 2, 409-414
doi:10.4236/ib.2010.24054 Published Online December 2010 (http://www.scirp.org/journal/ib)
The Role of Fair Value Accounting for Investment
in Securities: Evidences from the Chinese Stock
Exchanged Market
Jing Li, ParkSang Kyu
Department of Accounting, Gyeongsang national university, GSNU, Jinju, South Korea.
Received August 15th, 2010; revised September 29th, 2010; accepted November 3rd, 2010.
ABSTRACT
The purpose of this study is to examine the relevance of fair value accounting measurement for investment in securities.
We use three measurements for fair value: net asset based on fair value per share (FV), fair value adjusted amount per
share (FVAD) and fair value adjusted investment gain and loss in earnings per share (HOLDG). Our sample is com-
posed of Chinese listed companies from period 2006 to the end of 2008. The empirical result shows that first, there is
the relevance between stock price and fair value measured information. Second, the explanation power of fair value
measures for stock price fluctuation in the listed companies, Third, There are distinct relativity between volatility of
return of stock and fair value measured information.
Keywords: Fair Value Accounting, Investment Securities, Role Relevance
1. Introduction
At present, Both financial accounting standard board and
international accounting standard board are transferring
from historical cost accounting to fair value accounting
in making accounting standards. fair value as a meas-
urement basis in accounting is becoming increasingly
importance, this growth require that fair value lead to
improved financial reporting, in 2006, the Financial ac-
counting standards board (FASB) defined fair value for
financial reporting purposes and provided a framework
for measuring fair value to improve the quality of fair
values recognized or disclosed in the financial statements.
In this paper, we used the variables from balance sheet
and income statement; we use three measurements for
fair value: net asset based on fair value per share (FV),
fair value adjusted amount per share (FVAD) and fair
value adjusted investment gain and loss in earnings per
share (HOLDG), our sample is composed of Chinese
listed companies from period 2006 to the end of 2008.
Because the fair value measurement was accepted for-
mally in the accounting statements from 2006 in china.
The purpose of this study is to examine the role rele-
vance of fair value accounting measurement for invest-
ment in securities. The empirical result shows that First,
there is negative relevance between the stock price and
fair value measured information. Second, the explanation
power of fair value measures for stock price fluctuation
is larger than that for other items in the listed companies.
Third, there is distinct relativity between volatility of
return of stock and fair value measured information.
The remainder of the paper is organized as follows.
Section 2 Provides relevant prior Research. Section 3
describes hypotheses and Research model. Section 4
describes the data and descriptive statistics. Section 5
concludes investment in securities.
2. Literature Review
Most studies that investigate the value-relevance and
reliability of fair value disclosures of financial informa-
tion focus on listed companies. The relevance of ac-
counting information in the developed markets has long
been documented since the seminal work of Ball and
Brown [1]. Chen and Wang, 2004, and Haw, Qi and Wu
[2] have examined the relevance of accounting informa-
tion in China in various time periods prior to the acces-
sion of China. These studies focus on comparing the as-
sociation between aggregate accounting information and
stock prices for firms preparing financial reports based
on China GAAP and those following IAS GAAP (e.g. A-

The Role of Fair Value Accounting for Investment in Securities: Evidences from the Chinese Stock Exchanged Market 410
and B-Share firms respectively). The results from these
studies are inconclusive with some finding that earnings
and book value of equity under IAS are more value rele-
vant than China GAAP-based earnings and book value
[3], value relevance has increased over time from 1992
to 1996 [4], and some (e.g., Sami and Zhou, 2004) re-
porting a decline in the value relevance of accounting
numbers under the China GAAP and no change in the
value relevance of accounting information under IAS
GAAP.
Bath [4] find that the multiple on earnings before se-
curities gains and losses is positive relevance, and sug-
gest that the market might not value realized securities
gains and losses because they are transitory, they lack
timeliness. In our study, we also find between the securi-
ties gains and losses and market value of securities are
positive relevance.
Maines and Whalen [5] provide a review of empirical
accounting research of the reliability of accounting in-
formation. While reliability is an essential characteristic
of useful accounting information, understanding and
providing evidence with respect to the role of reliability
is complex.
Carroll (2003) Examine closed-end mutual funds and
find significant associations between stock price metrics
and the fair values of investment securities. They inves-
tigate across different fund types with differing reliability
levels with respect to fair value measures of the invest-
ment securities and find that significant association re-
mains for all types. And suggest that value relevance in
this setting is not hindered by reliability concerns.
Mark Kohl beck (2008) investigate the perceived reli-
ability of fair value measures in the banking industry to
provide evidence on changes in the market’s perception
about the reliability, in the wake of events with opposing
effects on perceived reliability. Mark contribute to the
extant literature by directly providing evidence on an
important but elusive qualitative characteristic of ac-
counting information and show that the market-based
reliability metrics are affected by external events and
these events overshadowed the impact of regulatory and
auditing standards that should reliability.
Igor Gorchakov [6] contribute to literature on fair
value accounting by showing that the use of verifiable
fair value estimates can impact economic decision mak-
ing and lead to lower distribution than implied by actual
economic performance. We show that the usefulness of
fair value accounting is likely to depend on investors’
ability to process complex accounting information and
understand its implications for future earnings.
Roger Graham (1998) test for a relation between the
difference between disclosed fair value and book values
of the equity method investments and the market values
and stock returns of investors , they a significant positive
relation. And suggest that requiring recognition of the
fair values of equity method investments, at least for
equity method investments in publicly-traded stocks,
should be considered by standard setters.
Isabel Costa [7] show that the relative value relevance
of different types of fair value estimates of investment
property by exploring the European setting where listed
firms are allowed to choose either the fair value model or
the cost model as their accounting policy for investment
property. And suggest that investors distinguish recog-
nized cost and recognized fair value of investment prop-
erty.
Collins et al. (1997) suggest that using book values of
equity to evaluate firms with small-sizes, intangible-
intensities and reporting negative earnings is more ap-
propriate than using earnings in light of investors’ points
of view that small firms may be more likely to face fi-
nancial distress than large firms. Firms reporting nega-
tive earnings, have smaller earnings response coefficients
(ERC) to stock returns than firms who report positive
earnings [8]. Chen et al. [3] suggest that earnings are
value-relevant for firms with positive earnings and that
value-relevance shift to book values for firms with nega-
tive earnings. In addition, both earnings and book values
are value-relevant for firms with positive earnings, and
that value-relevance shifts to book values for firms with
negative earnings. In addition, both earnings and book
values are value-relevant for large and small firms, while
earnings coefficients are larger than book values coeffi-
cients for small firms.
3. Research Model and Hypotheses
The fair value measurement is to take measure of the fair
value of the capital and liabilities at the balance sheet
date, but also measured the profits and losses that caused
by the change of fair value. This can compensate for the
lacking of accounting earnings, and more reasonably
reflect the financial position, operating results, cash flow
and real earnings of the enterprise [9].
The basic goal of modern accounting is to be useful
for a decision-making, takes into account to reflect the
fiduciary duty. In the concept of fiduciary responsibility,
the accounting information mainly reports the responsi-
bility of management that fulfills the economic situation.
Assets measurement is mainly to protect the assets safety
and integrity, and more emphasis on the reliability of
accounting information, and select historical cost as a
measurement model. In the decision-usefulness view, the
relevance associated with the concept of decision-useful
features. We increase relevance in order to enhance the
usefulness of the decision-making. Accounting goal re-
quire not only the information in the past, but also the

The Role of Fair Value Accounting for Investment in Securities: Evidences from the Chinese Stock Exchanged Market 411
information on the performance of present and future.
We advocate using a market-pricing to determine the fair
value of financial assets. Fair value measurement is not
only able to meet the needs of short-term speculative, but
also able to meet the needs of investors in the long-term
decision-making, which is widely used [10]. Currently,
fair value measurement’s basis for decision-usefulness
view still exists. It is difficult to weaken the fair value
measurement.
There are two research related to China’s capital mar-
ket with Accounting information, the one based on A-
share market, the researchers found the information on
accounting earnings to explain stock returns is limit and
the different indicators of the return have the different
Correlation. the others is B share market, the researchers
found B-share listed companies prepared under Interna-
tional Accounting Standards IAS earnings and book net
assets have more explanatory power than earnings and
book net assets of its stock price in accordance with PRC
GAAP.
Deng [11] has researched according to B share com-
panies in China 1997-2004 public financial information
and market data for relevance of fair value information,
the study found that B-share market in accordance with
International Accounting Standard No IAS39 disclosed
fair value information significant increase the value rele-
vance of accounting earnings.
However, A-share market implement the Chinese ac-
counting standards, from January 1, 2007, the new ac-
counting standards was implemented, A-share listed
companies began to apply fair value and provide relevant
information. Under the new accounting standards, inves-
tors can apply the fair value information and make the
right decision for investment in securities? Thus, we hy-
pothesized that the A-share market can respond to fair
value, In other words, the stock prices can reflect the fair
value information.
H1: The market stock price can reflect the fair value
accounting information of listed company
From the previous literature, we can see the incre-
mental effect of fair value with information, which im-
prove the relevance of accounting information. the fair
value will be through the “mark to market” (mark-to-
market) reflected accounting earnings of listed compa-
nies in the market with the process changes .Thus, when
the market rises, the accounting earnings will rise; and
the accounting earnings rose will drive the stock prices,
which form a cycle, the cycle direct to the opposite when
the market is down. This cycle consists of two sides: one
is market price of the asset be very sensitive for the fair
value, second, there is “mark to market” pricing, the fair
value of assets in an active market is the market price.
Thus, we propose the following two hypotheses.
H2: the fair value information has significant ex-
planatory power for stock price with Changes
H3: there is significantly correlation between Fair
value information and stock return
In general, research supports that reliability is impor-
tant in assessing accounting information usefulness,
which has introduced in the prior studies. A number of
recent events likely affect investor decisions in general
and their beliefs about the reliability of accounting in-
formation specifically.
In our paper, I examine the explanation power of fair
value measures disclosed in the financial statements.
We use two models to test the hypothesis in this paper.
They are include Price model ,Return model .The former
two models are evolved from the Ohlson [12] model It is
related to earnings and book values, and can examine
whether the balance sheet and income information are
associated with stock prices (Barth 1996; Burgstaher &
Dichev, 1997), the Ohlson (1995) model as followed:
01 2ititit it
PBVE




In this model, it
P is the firm’s share price at the t
year when annual report was showed; it E is the firm I‘s
earning per share at t year, it BV is the firm’s net asset
per share at t year.
This paper to test the hypothesis and observe whether
the fair value price has explanatory power, or whether
response to the fair value of stock price information, the
measured factors that was affected by fair value method
in the it BV and it E will be computed ,the composition
formulas as followed:
BVFVFVAD BVBFVEEBFVHOLDG

 ，
The
F
V is the fair value of book value per share ,it
equals fair value measured financial asset minus fair
value measured financial Liabilities divided by total eq-
uity;
F
VAD is the fair value adjustment per share, it
equals the fair value of Available for sale financial assets
divided by the total equity; BVBFV is the non-fair
value of net assets per share, it equals the book value
minus the fair value of book value per share and the fair
value adjustment per share, EBFV is the non-fair value
of net earnings per share, it equals earning minus fair
value adjusted investment gain and loss in earnings per
share (HOLDG), the HOLDG equals Net earning plus
investment earning in the fair value measurement divided
by total equity.
So the Ohlson model become the model (1)
012 3
45
itit itit
itit it
PBVBFV FV FVAD
EBFV HOLDG
 
 


 (1)
The model (1) divided 1it
P, we obtained the return
model (2)

The Role of Fair Value Accounting for Investment in Securities: Evidences from the Chinese Stock Exchanged Market 412
012 3
111
it itit
it
itit it
BVBFVFV FVAD
RET PPP
 

 
45
11
it it
it
it it
EBFV HOLDG
PP



 (2)
it
RET Is the firm I’s rate of return at T time period.
All variable in model are measured as of the fiscal
year-end and in order to obtain simply the tested result,
we used the value is basis on per shares.
4. Statistical Process and Results
Our sample is composed of Chinese listed company from
period 2006 to the end of 2008. Because the fair value
measurement was accepted formally in the accounting
statements from 2006 in china. Which provided opportu-
nity is to examine the relevance of fair value accounting
measurement for investment in securities.
This paper analyzes the sample principle are:
1) Excluding the financial companies
2) Excluding stock data is not complete Companies
3) Excluding ST, PT companies
4) Excluding companies listed after 2005
We collect 1664 effective stocks altogether, the detail
is following:
Table 2 shows that the price model results of descrip-
tive statistics, the full sample are from the 2006 Annual
Report, 2007 Annual Report and 2008 Annual Report as
the target. From the mean point of view, the net assets
per share (BV) is 2.39 per share, after deducting the fair
value of net assets per share after adjustment (BVBFV)
Table 1. Sample.
Total sample: 2034
ST&PT: 34
stock data is not complete Companies: 106
the financial companies: 61
Table 2. The sample descriptive statistics.
Descriptive Statistics – price Model
Items Min Max Mean S.D
P 0.68 149.83 14.50 13.97
BV −11.37 12.65 2.39 2.21
E −5.69 4.42 0.22 0.53
BVBFV −490.80 77.34 2.03 17.80
FV −74.66 24.701 0.150 0.893
FVAD −8.392 20.128 0.031 0.591
EBFV −3.227 5.543 0.190 0.390
HOLDG −0.884 3.382 0.034 0.150
is 2.03 per share, the two items are closely, the fair value
accounting for about 6% in the net assets per share. In
addition, earnings per share (E) are 0.22 per share, the
fair value gain or loss is 0.034 per share, accounting for
about 15%.
Table 3 shows that the Pearson correlation analysis
for the relevant variables of the price model. There are
significant positive correlation between the Net assets
per share (BV) and earnings per share (E), and the coef-
ficient of between them is 0.54. Similarly, there are the
significantly positive correlation between BVBFV and
EBFV, and the coefficient is 0.519. However, the FV and
FVAD have a significant negative correlation with the
BVBFV, and the HOLDG and EBFV was significant
negative relationship. In addition, the fair value of the
three relevant variables in which was a significant posi-
tive correlation, and the FV and FVAD has high corre-
lated coefficient 0.637, the result verify hypothesis1: The
market stock price can reflect the fair value accounting
information of listed company.
The Price model regression results shows in Table 4,
Table 3. Pearson correlation analysis-price model.
PBVE BVBFVFV FVAD EBFVHOLDG
.483
.000
.583
.000
.437
.000
.078
.000
.065
.000
.565
.000
.094
.000
.540
.000
.761
.000
.388
.000
.258
.000
.489
.000
.177
.000
.502
.000
.079
.000
.038
.013
.929
.000
.269
.000
−.261
.000
−.337
.000
.519
.000
−.001
.923
.637
.000
−.029
(.059)
.289
.000
−.021
(.175)
−.157
.000
−.106
(.000)
***/**/* indicate statistical significance at the 1, 5, and 10 percent levels
(two-tailed).
Table 4. Regression analysis-price model.
coefficients t-value P-value VIF
BVBFV −0.053 −2.071 0.003 0.114
FV −0.162 −2.445 0.001 7.371
FVAD 0.151 2.280 0.002 7.366
EBFV 0.004 0.139 0.013 1.489
HOLDG 0.135 0.195 0.084 0.8107
BV 0.088 3.140 0.002 1.339
E 0.041 1.251 0.001 1.830
F-value: 0.68;R:0.77; Adjusted R Square: 0.781
012 3
45
itit itit
itit it
PBVBFV FV FVAD
EBFV HOLDG
 
 




The Role of Fair Value Accounting for Investment in Securities: Evidences from the Chinese Stock Exchanged Market 413
in which give there gression results of the sample. Ohl-
son model showing net assets per share (EV), earnings
per share (E) on the stock price (P) were significantly
correlation, indicating that net assets per share and net
income per share for price have the strong explanatory
power. Net assets per share fair value (FV), fair value
adjustments per share (FVAD) and net income per share
investment income at fair value adjustments (HOLDG)
were significantly correlated with the stock price, the
coefficients were showed, which show that stock prices
can reflect the fair value of the accounting information.
The result shows the hypothesis 1 and hypothesis 2.
Table 5 is the descriptive statistics of return model
which show that the different listed companies has the
differences
Table 6 is the Pearson correlation analysis of the re-
turn model. Between Net assets per share (BV) and net
income per share (E) was the high correlation, and the
Table 5. Descriptive statistics-return model.
Descriptive Statistics –Return Model
Item Min Max Mean S.D
RET −87.60 937.537 73.432 115.034
1
it
it
B
VBFV
P
−3.146 1.859 0.338 0.302
1
it
it
F
V
P
−0.231 2.763 0.019 0.109
1
it
it
F
VAD
P
−0.348 2.251 0.007 0.077
1
it
it
EBFV
P
−0.655 1.354 0.015 0.056
1
it
it
H
OLDG
P
−0.251 0.322 0.006 0.022
Table 6. Pearson correlation analysis - return model.
RET BV E BVBFV FVFVAD EBFVHOLDG
.286
.000
.228
.000
.402
.000
.119
.000
.122
.000
.183
.000
.193
.000
.588
.000
.381
.000
.112
.000
.105
.000
.084
.000
.040
.010
.139
.000
.040
.010
.020
.204
.586
.000
.146
.000
−.24
4
.000
−.253
.000
.197
.000
.079
.000
.889
.000
−.029
(.066)
.230
.000
−.010
(.505)
.125
.000
−.130
(.000)
***/**/* indicate statistical significance at the 1,5,and 10 percent levels
(two-tailed).
coefficient is 0.588; BVBFV and EBFV was significant
positive correlation; FV, FVAD and BVBFV was sig-
nificant negative correlation, HOLDG and EBFV is also
a significant negative correlation. The hypothesis 3 was
verified in this model.
The Table 7 show that the (FV) is significant, the rela-
tion between RET and (FVAD’) (HOLDG’) are positive.
The coefficient of (FVAD’) is 2.135, the coefficient of
(BVBFV’) is 4.123; The coefficient of (HOLDG’) is
2.483., the coefficient of (EBFV’) is 0.622,whch shows
that, the fair value accounting information has impact on
stock prices greater than the other factors of change in
stock price.
5. Conclusions
Fair value accounting are becoming more important in
financial reporting because of it can provide relevant
information are usefully. The reliability information
would provide investor a new judging rule used in mak-
ing decision. In this paper, we investigate: First, the
stock market value and fair value measured information
are correlation. Next the explanation power of fair value
measures for gains or losses is more than that for other
items in the listed industry. There is distinct relevance
between the stock return volatility and fair value meas-
ured information in the listed company Those empirical
findings not only help us further understand economical
implication of the application of fair value measurement
in Chinese accounting standards, But also will take on
the more important role in the securities investment.
Our most important contribution is to answer in many
variables which one will take on the important role in
equity investment under fair value accounting measure-
ment.
Table 7. Regression analysis - return model.
coefficient t-value p-value VIF
1
it
it
B
VBFV
P
4.123 8.310 0.000 2.109
1
it
it
F
V
P
2.024 5.543 0.000 5.258
1
it
it
F
VAD
P
2.135 6.601 0.000 5.314
1
it
it
EBFV
P
−0.622 −0.782 0.000 2.907
1
it
it
H
OLDG
P
2.483 2.610 0.434 2.500
R square:0.083; F: 23.098
012 3
111
45
11
it itit
it
itit it
it it
it
it it
BVBFV FV FVAD
RET PPP
EBFV HOLDG
PP

 






The Role of Fair Value Accounting for Investment in Securities: Evidences from the Chinese Stock Exchanged Market 414
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