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The Effect of Fair Value Method Adoption: Evidence from Real Estate Firms in the EU


The adoption of the International Accounting Standard 40 (IAS 40) in 2005 by public companies in the European Union required firms to disclose the fair value of their investment properties. We study whether this increase in the transparency in financial reporting reduces information asymmetry and leads to higher pricing efficiency and improved liquidity. We investigate this question in the context of the real estate industry, which due to its unique structure stands to be affected the most by the adoption of the fair value method. We observe that post regulation the coefficients of variation of trading volume and daily turnover decreased significantly, while turnover ratio increased significantly. In addition, these effects are stronger for larger firms. We further note that although post-IAS 40 asymmetric information decreases and liquidity increases, the disclosure of fair value does not lead to lower NAV deviation. Furthermore, our results suggest that fair value disclosure exacerbates NAV deviation and illiquidity during the crisis period.

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Fig. 1


  1. Morri and Baccarin (2016) suggest that a priori differences between the two valuations should be expected due to differences in liquidity, price formation, financial structuring, search costs, management and control, taxation, and transaction costs between real estate assets and publicly-traded real estate.

  2. By contrast, Quagli and Avallone (2010) find that the likelihood of choosing fair value method is negatively related to the market-to-book ratio (a proxy of information asymmetry), which is in conflict with the extant evidence.

  3. Private firms with publicly traded debt are not subject to this regulation. Firms having non-December fiscal year-ends adopted IFRS in fiscal year 2006.

  4. IAS 40 was issued on December 18th, 2003 and became effective for annual periods beginning on or after January 1st, 2005. For more information see:

  5. Other reasons for deviation of market prices from NAV are managerial ownership, tax timing, and market segmentation. However, despite extensive research, there is lack of consensus on the impact of individual factors explored in the literature on the deviation.

  6. In a cross-country study, Cumming and Walz (2010) report that PE funds systematically overstate valuations to attract investors to future fund-raising, and the extent of manipulation is greater in countries where legal systems and disclosure requirements are less stringent.

  7. We drop Cyprus (2 observations) from the sample as we don’t have NAV data for this country.

  8. Conducting the VCV and turnover models using the smaller sample of 1378 observations does not change the results.

  9. In unreported results we also test whether the effect post regulation for voluntary disclosing firms is different than for mandatory disclosing firms, but we find no evidence. The voluntary disclosure effect does not change post regulation. This is consistent with Muller III et al.’s (2011) findings.

  10. We also test, if larger firms are more likely to choose to disclose voluntary, but we do not find any evidence for potential endogeneity.


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We gratefully acknowledge Brad Case, Michael LaCour-Little, and an anonymous referee for valuable comments and suggestions. We also thank the participants of the FannieMae Appraisal Symposium, 2018, Washington, DC for helpful discussion.

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Correspondence to Milena T Petrova.

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Appendix: Variable Definitions

Appendix: Variable Definitions

Table 14 This table provides definitions of all variables used in our analysis

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Ghosh, C., Liang, M. & Petrova, M. The Effect of Fair Value Method Adoption: Evidence from Real Estate Firms in the EU. J Real Estate Finan Econ 60, 205–237 (2020).

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  • Information asymmetry
  • Pricing efficiency
  • Fair value
  • Net asset value
  • IFRS