simply requiring the use of fair value accounting is not appropriate for all cases. Some studies analyzed the value-relevance of fair value measurements on the financial performance of some companies. Penman (2007) concludes that book values change considerably when investments are accounted for at fair value, and that the magnitude of this change varies between companies and types of assets. However, only in few cases the difference in valuation leads to a relevant difference in companies' efficiency scores. That is, within the sample the overall rank order of the companies with regard to efficiency and profitability remains largely the same under both valuation bases. These findings seem to indicate that a change from historical cost to fair value accounting for investments would alter analyst perceptions of a limited number of companies but would not have any effect for the majority of them. Consequently, the value-relevance of fair value measures and their effect on stock prices has not always been reported to be a positive issue. Indeed, several studies have found that fair value measures have caused negative stock price reactions. This is generally in the case of banks, given their relatively large proportion of investment securities to total assets, compared to other types of businesses. Cornett et al. (1996) argue that new costs on banks resulting from fair value accounting announcements exceed benefits from reducing alleged
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gains-trading practices. Beatty et al. (1996) reported negative effects of stock price movements for banks as a result of fair value accounting. This was found to in most of the cases of banks more frequently trading their investments, having longer maturity investments, and being more fully hedged against interest rate changes (Beatty et al., 1996). Indeed, the adoption of IFRS in the European Union, which included adoption of fair value accounting through IAS 32 and IAS 39, had its effect on European capital markets. Armstrong et al. (2006) reported that European capital markets show positive reaction to events increasing the likelihood of adopting IFRS, and negative reaction to events decreasing that likelihood. They argue that investors prefer accounting harmonization and perceive that adoption of IFRS has benefits that outweigh its costs. Armstrong et al. (2006) also found that this result holds for banks, despite widespread arguments that European Union banks oppose IAS 39. Lopes and Rodrigues (2007) found that, regarding the disclosure level under IAS 32 and IAS 39, disclosure by Portuguese listed companies is related to size, auditor type, listing status, and economic sector. Nevertheless, surveys by Larson and Street (2004) and Jermakowicz and Gornik-Tomaszewski (2006) showed that in Europe, IAS 32 and IAS 39 were seen as too complicated and complex in actual implementation, and that this is a significant barrier to IFRS convergence.
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