Fair Value Accounting and Investment Efficiency

Abstract

The fair value accounting maintains a strong theoretical link with resource allocation since it allows a vision closer to the economic reality than the historical cost, particularly for financial instruments. The optimal allocation of resources being the ultimate goal of any economic system, our study examines the link between fair value accounting and the efficient allocation of resources especially investment efficiency. While the performance of financial instruments was not easily identifiable with former accounting models, the advent of the fair value as an evaluation mode of financial instruments made prospective future profits more visible, liable to incite companies to invest strongly in financial investments. The danger on an efficient allocation of resources in non-financial corporations is therefore the redeployment of the assets of the company following a financial strategy and not in an industrial logic. On a sample of Canadian firms belonging to the TSX Composite Index for the period between 2007 and 2011, our results indicate that the profitability of financial instruments measured in fair value does not stimulate the establishment of a financial strategy turned towards the substitution of financial to productive investment. Primarily, our work contributes to the debate on the legitimacy of the employment of fair value accounting as an evaluation mode for assets and liabilities since its alleged role in the last financial crisis and, secondly, the results of our research are significant in the context of the adoption, by Canada, of international financial reporting standards, for which fair value constitutes one of the cornerstones.