Fair Value or Cost Mode Drivers of Choice for Ias 40

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European Accounting Review
Vol. 19, No. 3, 461– 493, 2010

Fair Value or Cost Model? Drivers of Choice for IAS 40 in the Real
Estate Industry
A. QUAGLI∗ and F. AVALLONE∗∗

Department of Accounting and Business Studies (DITEA), University of Genova, Genova, Italy and ∗ ∗ Department of Computer and Management Science (DISA), University of Trento,
Trento, Italy

(Received September 2008; accepted February 2010)
ABSTRACT The IFRS mandatory adoption in European countries is an excellent context from which to assess the validity of accounting choice theory, which postulates that information asymmetry, contractual efficiency (agency costs) and managerial opportunism reasons could drive the choice. With this aim, we test the impact
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Our findings suggest that all the rationales described by accounting choice theory (information asymmetry, contractual efficiency and managerial opportunism) drive the decision to adopt fair value. Indeed, regarding contractual efficiency reasons in particular, we find that the larger the size (proxy of political costs), the less likely fair value is to be chosen, while leverage and consequent lenders’ protection seems to be insignificant for the choice.
Furthermore, our results show that market-to-book ratio (MTBV) (proxy of information asymmetry) is negatively related to the fair value choice. This finding, that conflicts with existing literature, could be accounted for in the real estate industry due to the fact that high levels of MTBV in this context reveal growth opportunities associated with a fair estimation of investment properties and therefore with a low information asymmetry. Managerial opportunism behaviour, measured by a dummy variable for earnings smoothing, seems to have an influence on fair value choice.
While all these variables seem to have an influence on the fair value choice, the same variables do not explain the choice of historical cost with the IFRS1 revaluation option in preference to the cost maintenance approach.
This paper offers various contributions to current

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