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Research Seminars & Workshops @ IRES


Associate Professor Desmond Tsang
McGill University

Earnings management, firm Location, and financial reporting discretion: An analysis of fair value reporting for investment property in an emerging market


Date:

20 August 2015 (Thursday)

Time:

4.00pm - 5.30pm

Venue:

SDE 3, Level 3, School Conference Room


Abstract

We examine firms’ decision to adopt fair value reporting for investment property, and how property location affects this financial reporting choice. Unlike financial assets reported at fair value, investment properties cannot be traded on an exchange. Hence, fair values for investment properties are less verifiable and can be subject to more managerial discretion. As investment properties are location-specific, firms also have more opportunities to misstate fair values where the real estate markets are illiquid and investors’ monitoring is low. Utilizing the emerging market setting of China, we find evidence that the fair value option for investment property is more likely to be chosen by firms that had significant prior earnings management activities. We also find that earnings management firms are more likely to adopt the fair value model when the firms’ headquarters and investment properties are located in less developed regions. Confirming that some firms choose the fair value model to manage earnings, we show that firms choosing the fair value model are more likely to use unrealized gains and losses associated with investment properties to smooth earnings or to beat earnings benchmarks. Overall, our findings indicate fair value reporting decision for investment property in the emerging Chinese market is substantially driven by managerial opportunism.

About the Speaker

Professor Tsang began his career in the auditing department at Deloitte and Touche in Hong Kong and later worked as an economist at the Ontario Ministry of Finance in Canada. Subsequently he pursued his PhD studies at the University of California at Berkeley, majoring in real estate and accounting. His research in the area of real estate specializes in the financial reporting issues of Real Estate Investment Trusts, and on Corporate Governance and International Real Estate. His research interests in accounting include: Earnings Management; Performance Measurement; IFRS & Accounting Fraud. Professor Tsang has published in real estate and accounting journals, including top-tier journals such as Real Estate Economics, Journal of Real Estate Research and Journal of Real Estate Finance and Economics. He has presented his research findings at conferences in the US, Europe and Asia and has received several best paper awards at these conferences. In 2015, he received the Aareal Award of Excellence in Real Estate Research.

Professor Tsang is a Certified Public Accountant (CPA) in the US and a Chartered Financial Analyst (CFA). Professor Tsang teaches Intermediate Financial Accounting I & Financial Statement Analysis at the undergraduate level and Intermediate Financial Reporting I at the MBA level. He was nominated for the Principal's Prize for Excellence in Teaching at the university level twice in 2009 and 2013. He was the recipient of the Desautels Faculty of Management Distinguished Teaching Award in 2010 and was chosen by students of the Management Undergraduate Society as the Professor of the Year 2012.

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