Journal of Applied Finance & Banking

The Effects of the Fair Value Option under IAS 40 on the Volatility of Earnings

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• Abstract

  The study examines the effects of applying fair value accounting under IAS 40 on the volatility of earnings. It studies how the addition of unrealized gains and losses in the income statement might affect the incremental explanatory power of earnings. The study covers the period of 2002-2009 and the data collected from the Jordanian Shareholding Companies listed on Amman Stock Exchange. In this study the valuation model of Ohlson (1995) and the technique of Theil (1971) have been utilized. The results point out that unrealized gains and losses affect the net income and the results of cross-sectional regression indicate that net income and book values jointly and individually are positively and significantly related to stock prices. The incremental information of net income is greater than that of book values and the addition of unrealized gain in income increases the explanatory power of the model.