Relevance, reliability and restricted security fair values: a look at investment trusts

Abstract

Purpose

The purpose of this study is to assess the pricing effects of financial reporting decision usefulness in terms of its constituent elements of relevance and reliability. Although it has long been intuitively appealing to believe in the decision usefulness of more relevant and reliable disclosures, they have been troublesome to demonstrate empirically. The mixed results have often been attributed to the richness of operating company settings.

Design/methodology/approach

This study addresses that problem by using 363 firm years of data from US market‐priced mutual funds (termed closed end funds in some countries and investment trusts in others), whose assets are comprised almost entirely of investment securities.

Findings

The results are consistent with the principal hypotheses – both relevance and reliability are valued by the market.

Practical implications

Overall, these findings provide a basis not only for reconciling prior, conflicting results, but in adding to our understanding of how disclosure characteristics are valued by investors, a particularly pertinent topic given the IASB's and the FASB's projects in this area.

Originality/value

The simplicity and elegance of the market‐priced mutual fund setting facilitates development of a model that simultaneously distinguishes between the relevance and reliability. Cost (less relevant) and fair‐value (more relevant) disclosures are gathered for both restricted (less reliable) and unrestricted (more reliable) securities for each firm year. Both levels and returns type methods are used to assess the effects of these separate elements of decision usefulness on securities valuation.

Citation

Bricker, R. and Chandar, N. (2012), "Relevance, reliability and restricted security fair values: a look at investment trusts", Managerial Finance, Vol. 38 No. 12, pp. 1203-1225. https://doi.org/10.1108/03074351211271292