Accounting quality: Choosing fair value versus historical cost

This paper compares accounting quality metrics for real estate firms to investigate whether the choice of investment property measurement model is associated with earnings management and lower value relevance. We examine the different accounting quality levels of different real estate firms which are classified by investment property measurement under China's new accounting standards from 2007 to 2009. We hypothesize and find evidence that the fair value firms have lower variance of change in net income, lower ratio of the variance of change in net income and change in cash flows, higher frequency of small positive net income, and lower value relevance. The empirical results indicate that real estate firms which adopt fair value model to measure investment property have lower accounting quality than other real estate firms. We also find that no fair value firm report negative net income. Overall, our results suggest that the adoption of fair value model should be considered carefully especially under China's special market background.