Empirical Research on the Relationship between Stock Prices and the Fair Value Accounting Information

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Empirical study based on bank share prices listed on the Tokyo Stock Exchange shows evidence that fair value amount of securities and derivatives disclosed as footnotes to the financial statements provide significant explanatory power for bank share prices beyond that provided by related book values. Especially, incremental explanatory power is found for fair value of interest swap. Notional or contractual amounts of off-balance sheet instruments are also reflected in the stock prices, which implies that investors may interpret them as a useful proxy for future income generated by goodwill or know-how for risk control.Value-relevance is also empirically confirmed for pension accounting information disclosed by Japanese corporations, which prepare consolidated financial statements, based on the U.S. standards. The coefficient on fair value of total pension plan assets is positive and significant as predicted. Both accumulated and projected pension obligations are negatively correlated to the stock prices at the statistically significant level. This is the strong evidence of the usefulness of pension accounting, which is newly introduced into the Japanese accounting standards.Real estate value tax provides a basis for estimating fair value of land owned by the corporation. Regression of stock prices on the estimated fair value of real estate gives evidence that the fair value amount possess significant incremental information contents beyond those provided by book value of net worth and fair value of securities.Generally speaking, value relevance is found for the fair value of securities, derivatives, real estate, and pension plan assets and obligations. Therefore, it is worthwhile to study the empirical relationship between stock returns and the changes of fair value of these assets and liabilities.