ABSTRACT

Environmentadaptability of fair value accounting is studied in this paper from a corporate governance perspective. By analyzing the influence of fair value accounting on corporate governance, this paper tries to judge whether fair value accounting is adaptable to corporate governance environment in China, and the potential risk of the application of fair value accounting.

Fair value（fair market value）, also called fair price, is the price determined by knowledgeable parties under a fair market and willing conditions. Traditional accounting measurement is based on historical cost. However, with the development of derivative financial tools since 1990s, historical cost shows its limitations, and more and more attention was paid to fair value accounting for its high relevance. Then, among 33 standards issued by FASB in 1990s, there are 23 standards referred to fair value measurement. And among 31 standards issued in 2000s, all standards referred to fair value measurement. This, from initially applied in individual financial instruments to all financial instruments have fair value options, then financial debts, then other assets and debts, fair value tends to substitute historical cost as the dominant position in accounting measurement system.

When fair value gains high popularity as a new measurement, especially in international accounting standards, the financial crisis which began at the end of 2007 brought forward new challenges to the application of fair value. Practical circle has been targeting fair value, and deemed that, some financial instruments measured with fair-value under spiral drop stock market in financial crisis will lead to the losing of market confidence. Then, market gets trapped in a dangerous cycle. On the contrary, the opposite view is that, fair value measurement can make potential crisis exposing rapidly in the crisis, and bring the true situation to investors as soon as possible. with the debate of the advantages and disadvantages, and acceptation or rejection of the fair value, it seemed that, instead of stop using fair value measurement, the lively debate made the application of fair value more confirmative. Certainly, based on that the potential risks really exist in the economy, the future of the application of fair value develops in the direction of regulation and improvement after the crisis.

It has been a twisted road for the China Accounting Standards adopting fair value. Fair value measurement was first adopt in 1998, then it was limited when revising related standards in 2001, and then fair value has been reused in new standards issued since 2006. Extensive use of fair value again in CAS reflects our hesitation; this is largely under the pressure of the tendency of the accounting internationalization trend. Then, could our present economy environment adapt to this change? As for corporate governance of listed company begins relatively late in China, internal and external mechanism of corporate governance is not perfect. And china corporate governance environment is greatly different from the western developed countries. So, are Chinese companies ready for that? What is the affection of fair value on corporate governance? With the thinking over these questions, this paper studies the application of the fair value and the affections on corporate governance. There are 4 parts in this paper：

The first part is the introduction（chapter 1）, which explains the research theoretical and application background, clarifies the research contents, significance and methods, and briefly reviews the research steps.

The second part is the connotation of fair value and its evolution, including chapter 2 and chapter 3. Chapter 2 theoretically penetrates fair value. The theory bases, attributes and valuation of fair value are discussed in chapter 2. Chapter 3 analyzes the transition of corporate governance and the choice of fair value measurement. In this part, we analyze the potential request of fair value measurement putting forwarded by corporate governance with its development, and illustrate the course of the application of fair value in international accounting standards and Chinese accounting standards, and look forward to the future of the fair value's development. This provides the foundation for further analysis of the affection of fair value on corporate governance.

The third part is the application of fair value and its impact on corporate governance, includingchapter 4, chapter 5, chapter 6, and chapter 7. Chapter 4 analyzes the practical application of the fair value and its affection on stakeholders' decision-making. By observing actual application of the fair value with statements of listed companies, we found that the application of fair value is very cautious in Chinese listed companies, but further analysis of fair value on the impact of performance of enterprise indicates that the influence is quite large, and the application of fair value do have impacts on stakeholders.

Chapter 5 is the study of the fair value impact on earnings management. Firstly, this paper briefly analyses the earnings management' concept, motivation and the alternative of accounting policies which provide facilities to earnings management. Secondly, according to the process of the practical application of the fair value which involved in accounting policy choice and human judgment, this paper analyzes the potential risk of earnings management lies in fair value accounting. Finally, case studies and empirical analysis by testing the existence of earnings management in China's listed companies by using fair value accounting policy.

Chapter 6 is the study of the impacts of fair value accounting on managers' incentive pay. First, this paper analyses of the patterns of incentive pay under the principal-agent system; then analyzes the difficulties of incentive compensation under fair value accounting, including the difficulty in performance measurement and the likelihood of managers accounting behavior alienation under fair value accounting; Finally, through case studies and empirical analysis, the paper tests the fair value's impact on executive compensation.

Chapter7 is the study of the impact of fair value accounting on the capital market. First, from the theoretical analysis of the fair value's effects in the virtual economy, and the mechanism of the market effects of the fair value; second empirically tests the market effects of the fair value.

The fourth part is related research findings and countermeasures（Chapter 8）. Review the research results of previous chapter, based on this, put forward the countermeasures and suggestions from the perspective of fair value accounting regulations and applications, corporate governance and government supervision.

The thesis contains thefollowing innovations.1. Systematic analysis of the corporate governance environment changes and the choice of fair value measurement. By analyzing the change of external governance environment, such as the market, institutional, economic, technological, credit, etc. and the change of internal governance mechanisms, such as ownership structure, this paper illustrates the inevitability of choosing fair value measurement, and the fair value accounting will be the dominant measurement pattern in the future; 2. Analysis of the impact of the fair value application on firms' financial situation, profit, and stakeholders' decision-making since the implementation of new accounting standards in China; 3. System analyzes the earnings management risk contained in fair value accounting. This paper comprehensively analyzed the likely accounting fraud brought by fair value, and through case studies, empirical analysis, earnings management behavior by use of fair value accounting is primarily validated; 4. Factor analysis is used in this paper to test the effect of fair value application on executive compensation; 5. Analysis of the market effects and its mechanism, and empirical analysis is used to test the synergistic effect of cross-holdings and the procyclical effect in capital markets.

KEYWORDS: Fair value Corporate governance Stake-holders Earnings management Compensation incentive Market effects