This thesis examines two issues related to fair value accounting and compensation contracts. The first essay focuses on the adoption of IAS No. 40 by property companies in Hong Kong and its impact on executive compensation. As a departure from the conservatism principle, IFRS allows firms to revalue investment property and record the revaluation gains or losses (RGL) in income statement. This study shows that the revaluation gains are associated with executive compensation after convergence to IFRS, but not before. It also shows that this association is likely to be the result of opportunistic behavior for the following reasons. First, the executive compensation is not penalized by the revaluation losses. Second, the association is more evidenced in firms with more severe agency...[ Read more ]

This thesis examines two issues related to fair value accounting and compensation contracts. The first essay focuses on the adoption of IAS No. 40 by property companies in Hong Kong and its impact on executive compensation. As a departure from the conservatism principle, IFRS allows firms to revalue investment property and record the revaluation gains or losses (RGL) in income statement. This study shows that the revaluation gains are associated with executive compensation after convergence to IFRS, but not before. It also shows that this association is likely to be the result of opportunistic behavior for the following reasons. First, the executive compensation is not penalized by the revaluation losses. Second, the association is more evidenced in firms with more severe agency problems, such as those with lower founding family ownership, fewer independent non-executive directors on the board and the compensation committee, and no longer run by its founder. Thus, when agency problems are more severe, the IFRS’ treatment of the RGL can result in early distributions of unrealized gains to executives. The second essay focuses on the adoption of SFAS No. 130 by financial institutions in the US. SFAS No. 130 allows firms to choose to report the components of comprehensive income in either a performance-statement or a statement-of-equity format. The study shows that compensation contracts affect the choice of reporting format. In particular, firms whose executive compensation is more sensitive to unrealized gains or losses (UGL) from available-for-sale (AFS) securities are more likely to choose the performance-statement format. Furthermore, the association between UGL and executive compensation exists before and after SFAS No. 130 adoption in firms that choose the performance-statement format. The results indicate that firms take advantage of SFAS No. 130 to choose reporting formats that are aligned with their compensation schemes.