JournalofAccountingandPublicPolicy22(2003)

19–42

Relativevaluerelevanceofhistorical

costvs.fairvalue:Evidencefrom

bankholdingcompanies

InderK.Khurana*,Myung-SunKim1

SchoolofAccountancy,CollegeofBusiness,UniversityofMissouri––Columbia,317Middlebush,

Columbia,MO65211,USA

Abstract

Thisstudycomplementsthegrowingliteratureonthevaluerelevanceoffairvalueby

examiningthevalidityofthehypothesisthatfairvalueismoreinformativethanhis-

toricalcostasa nancialreportingstandardfor nancialinstruments.Usingthefair

valuedisclosuresmadeunderStatementofFinancialAccountingStandards(SFAS)No.

107andSFASNo.115bybankholdingcompanies(BHCs)overthe1995–98period,we

comparetherelativeexplanatorypoweroffairvalueandhistoricalcostinexplaining

equityvalues.Forourentiresample,weareunabletodetectadiscernibledi erencein

theinformativenessoffairvaluemeasurescollectivelyrelativetohistoricalcostmea-

sures.

However,forsmallBHCsandthosewithnoanalystsfollowing,we ndthathis-

toricalcostmeasuresofloansanddepositsaremoreinformativethanfairvalues.

Anecdotalevidenceindicatesthatloansanddepositsarenotactivelytradedandoften

involvemoresubjectivitywithrespecttothemethodsandassumptionsusedinesti-

matingtheirfairvalues.Incontrast,fairvalueofavailable-for-salesecurities,whichare

moreactivelytradedinwell-establishedmarkets,explainsequityvaluesmorethan

historicalcost.Takentogether,ourresultsareconsistentwiththenotionthatfairvalue

ismore(less)valuerelevantwhenobjectivemarket-determinedfairvaluemeasuresare

(not)available.Moreimportantly,ourresultssuggestthatsimplyrequiringfairvalue

asthereportedmeasurefor nancialinstrumentsmaynotimprovethequalityof

*Correspondingauthor.Tel.:+1-573-882-3474;fax:+1-573-882-2437.

E-mailaddresses:khuranai@missouri.edu(I.K.Khurana),sunkim@missouri.edu(M.Kim).

1Tel.:+1-573-882-1071.

0278-4254/03/$-seefrontmatterÓ2003ElsevierScienceInc.Allrightsreserved.

doi:10.1016/S0278-4254(02)00084-4