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Fair value of investment property and independent appraisers: the experience in the UK and Japan.

ABSTRACT

The fair value of investment property has become an important topic since the international advancement of fair value accounting. This article looks at the role of appraisers in fair market accounting. It elucidates the status of the fair value of investment property of companies in the United Kingdom, which pioneered it. The article also provides an analysis of the fair value of investment property of companies in Japan following the recent adoption of accounting standards for disclosure of the fair value. The analysis reveals that directors of companies use the valuations of outside appraisers to determine fair value when the unrealized value of the investment property is large, and investors recognize the usefulness of appraisers' valuations.

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The International Financial Reporting Standards (IFRS) have been adopted in many countries, and the assessment of the fair value of investment property in accounting practice has become more important than ever. Although IFRS has not been adopted in the United States, the Financial Accounting Standards Board (FASB) has actively pursued convergence of those standards with the US generally accepted accounting principles (GAAP). (1) The opportunities for appraisers to be engaged in the valuation of investment properties are expected to increase, even in the United States.

Japan also has not yet adopted IFRS. However, since 2010 Japanese accounting standards have mandated disclosure of the fair value of investment property in the notes to financial statements. (2) The amount of investment property held by Japanese companies is extremely large--larger than that held by European companies--but before the mandated disclosure it had been difficult for investors to assess the fair value of investment property of Japanese companies. As the fair value of investment property is now disclosed, information asymmetry on investment property in the securities market is expected to lessen.

In an economic transaction, information asymmetry occurs when all the necessary information is not disseminated to all the individuals involved in the transaction; instead, information is unevenly distributed to the parties involved. Akerlof explains the effect of information asymmetry by giving an example of the used car market. (3) He points out that when a customer cannot acquire correct information on the quality of a used car, the customer cannot confirm its quality even if the quality of the car is high. Consequently, the customer tends to hesitate in making a purchase. As high-quality cars cannot be distinguished from low-quality ones, there is no incentive for sellers to put high-quality cars on sale. As a result, the used-car market is saturated with low-quality cars. This can cause a negative chain reaction and lead to the collapse of the used-car market. To avoid this, sellers endeavor to provide correct and detailed information for customers to ease information asymmetry.

Similar uncertainty exists when companies possess investment property. In conventional financial statements, the value of investment property is based on its acquisition cost. Therefore, only a small number of individuals know the actual current value of the investment property. In other words, information asymmetry exists in investment property. If many investors know the actual value of the investment property due to the disclosure under fair value accounting, many problems caused by information asymmetry can be resolved, and the securities market can be stabilized.

As fair value accounting of investment property has been adopted in many countries, the importance of accurate valuation of investment property has increased. The fair value of investment property may be based on a director's valuation, which is performed by a director of the company, or may be based on an appraiser's valuation, which is performed by an outside specialist (independent appraiser). (4) When an appraiser's valuation is adopted, companies must bear the cost of the valuation in the form of an annual valuation fee. When a director's valuation is used to measure the fair value of investment property, the results may be skewed in favor of the companies. By discretionarily estimating the value of investment property, the profit on investment property can be adjusted freely. In the worst cases, the quality of financial statements decreases, and the significance of the accounting system becomes questionable.

The aim of the present study is to elucidate the actual status of the fair value of investment property of companies in the United Kingdom (UK), which has already adopted the IFRS, and to analyze Japanese companies that provided fair value information as well as the behavior of investors who used the information on the disclosed value of investment property held by Japanese companies. The study also examines the preferred method to measure the fair value of investment property and assesses the future role of appraisers internationally in fair value accounting. If appraisers' involvement in fair value accounting systems is recognized as contributing to the stabilization of the securities market, appraisers can expand their professional services in this field and increase their status in the business economics sphere.

What Is Investment Property Accounting?

Investment property accounting is part of the fair value accounting system. IFRS 13, "Fair Value Measurement," defines fair value as follows:

   Fair Value is the price that would be received to sell
   an asset or paid to transfer a liability in an orderly
   transaction between market participants at the
   measurement date. (5)


Fair value accounting became popular in the second half of the 1980s. During that period, a new financial product called derivative transactions entered the financial market Since then, the principal objective of business management has gradually shifted toward risk management. The prediction of future cash flow has become more important than ever, resulting in the increase in the usefulness of fair value accounting for investment property. The incorporation of fair value accounting has continued to reform accounting systems in general. Similar to accounting for financial instruments, investment property accounting plays an important role in the fair value accounting system.

The investment property accounting system originated with Statement of Standard Accounting Practice 19, "Accounting for Investment Properties," issued in the United Kingdom. (6) During the 1990s, the accounting system was internationalized, and in 2000, International Accounting Standard (IAS) 40, "Investment Property," was published. IAS 40 calls for the value of investment property to be remeasured using (1) a fair value model, (7) in which all changes in the fair value of an investment property are shown in a statement of profit and loss; or (2) a cost model, (8) in which the acquisition cost of the investment property after depreciation is measured, and the fair value is disclosed in notes to financial statements. (9)

When the fair value model is used, the changes in the fair value of the investment property influence the business's profit and greatly affect corporate management. Under current accounting standards, companies can arbitrarily select either an appraiser's valuation or a director's valuation as the method to measure the fair value of investment property. Under IAS 40.32, valuation by independent appraisers who have a professional qualification is recommended but not mandatory. The valuation method of investment property can be classified as a valuation by an independent appraiser who is a qualified professional (referred to as an appraiser's valuation in this article) or as a valuation by a company director (referred to as a director's valuation in this article). Therefore, the method used to measure the fair value of investment property must be scrutinized.

Regarding the valuation of investment property, the relationship between fair value and market value is questionable in many cases. However, the International Valuation Standards (IVS) state that fair value in IFRS is generally consistent with market value:

   The IVSB considers that the definitions of fair value
   in IFRS are generally consistent with market value. (10)


The IVS defines market value as

   the estimated amount for which an asset should
   exchange on the valuation date between a willing buyer
   and a willing seller in an arm's length transaction, after
   proper marketing and where the parties had each acted
   knowledgeably, prudently and without compulsion. (11)


Literature Review

Several accounting research studies have looked at the market value of real estate and revalued tangible fixed assets in the United Kingdom and in Australia. Studies also have investigated the reliability and the usefulness of appraisers' valuations and the motivation of directors of companies to select appraisers' valuations. These studies have found that the benefits of appraisers' valuations include the accuracy of the appraised value and the ability of the appraiser's valuation to ease information asymmetry in the securities market.

Dietrich, Harris, and Muller (12) study the reliability of appraisers' valuations of the fair value of investment property. In their study, the appraised value of real estate in financial statements that had been revalued was compared with the actual sale prices of investment property when it was sold. The accuracy of the valuations was measured based on the difference between the appraised value and the sale price. The results show the following:

* The reliability of the appraiser's valuation was greater than that of the director's valuation.

* In the case of a director's valuation, the accuracy of the appraised value was recognized when it was audited by six major audit corporations.

* The accuracy of an appraiser's valuation of investment property not audited by the six major audit corporations was higher than a director's valuation of the investment property audited by these corporations.

Thus, the reliability of the appraiser's valuation was high, with six major audit corporations contributing to the reliability of the asset valuation to some extent.

Muller and Riedl (13) also examine the usefulness of appraisers' valuations. They divide investment properties held by a company into those based on a director's valuation and those based on an appraiser's valuation and then analyze the bid-ask spread between the two valuations. In this study, the bid-ask spread is larger in the case of a director's valuation than in the case of an appraiser's valuation. This suggests that information asymmetry is greater in directors' valuations than in appraisers' valuations, and that the information provided by appraisers is more useful for investors than the information provided by directors. A study by Muller, Riedl, and Sellhorn (14) also verified the usefulness of appraisers' valuations in investment property accounting.

Brown, Izan, and Loh, (15) and Cotter and Zimmer (16) study the motivation for selecting appraisers' valuations. These studies focus on the revaluation of tangible fixed assets in Australia. Their analytical results reveal that appraisers' valuations are used when reporting the tangible fixed assets of financial institutions. Cotter and Richardson (17) use more recent data and conclude that the concept of corporate governance, rather than the fulfillment of accountability to financial institutions, influences the selection of appraisers' valuations.

Yamamoto (18) studies the role and the behavior of appraisers in asset-impairment accounting in Japan. This study reveals that use of an appraiser's valuation as a valuation method controls the discretionary earnings of company directors and increases the reliability of financial statements. Company directors are able to assess the impairment loss by arbitrarily valuing tangible fixed assets. As a result, they can adjust their profits. However, the valuation of investment property by outside appraisers prevents such arbitrary valuations by company directors. Although the aforementioned studies generally support the reliability and the usefulness of appraisers' valuations, the number of studies is insufficient for broad conclusions and further studies are needed.

Investment Property Accounting in UK Companies

This section examines the status of appraisers and their participation in ascertaining the fair value of investment property in the United Kingdom. The discussion here focuses on companies that have already adopted investment property accounting standard IAS 40. In the United Kingdom, appraisers are commonly involved in determining the fair value of investment property. Financial Times Stock Exchange 350 (FTSE 350) companies listed on the London Stock Exchange (as of February 1, 2011) are investigated here, based on accounting figures in the latest annual reports as of that date. Table 1 summarizes the data for general business companies, and Table 2 summaries data for financial institutions.

General Business Companies

Table la shows the adoption of the IAS 40 by 246 general business companies in the FTSE 350, excluding financial institutions. Of the 246 companies, 20 companies (8.1%) have adopted the IAS 40. The adoption rate of IAS 40 by companies in the real estate industry is high (75.0%), followed by commerce (24.1%). Other than these industries, few others have adopted IAS 40. The average value of the "investment property/total assets" of the companies in the real estate industry is high (72.2%). However, the values of the companies in other industries are about 1% or smaller. Thus, the possession of investment property by general business companies is extremely rare in the United Kingdom.

Table 1b shows the valuation models employed by the 20 companies that have adopted IAS 40. Of these, 12 companies have employed the fair value model and 8 use the cost model. Table 1c shows the valuation methods of the 12 companies that have adopted the fair value model; of the 12 companies, 7 employ an appraiser's valuation while 5 use a director's valuation.

Financial Institutions in FTSE 350

Financial institutions in the FTSE 350 were divided into four categories: real estate investment trust (REIT), life insurance, nonlife insurance, and others. Table 2a shows the IAS 40 adoption status of financial institutions in each of these four categories. In the REIT and life insurance categories, 100% of the companies have adopted IAS 40. This indicates that financial institutions in these two categories have close links with owned investment property. Table 2a also shows that for financial institutions, except for in the REIT category, the value of the investment property compared to total assets was low (1%-3%).

Table 2b shows the valuation models employed by the financial institutions that have adopted IAS 40.

As shown in this table, 28 of 29 financial institutions relied on the fair value model--a tendency that differed from that of the general business companies. Table 2c shows the valuation methods of the fair value model used by the 28 financial institutions. Unlike the general business companies, the majority of the financial institutions (22) employ an appraiser's valuation.

As mentioned, the adoption rate of the IAS 40 investment property provisions is higher among UR financial institutions than general business companies. The fair value model is the valuation model used by most financial institutions, with an appraiser's valuation as the most commonly used valuation method. Companies whose main business is the possession of investment property are likely have a strong motivation to disclose the real market value of investment property and to ensure the reliability of the fair value. In the United Kingdom, appraisers' valuations play an important role in the investment property accounting system, and therefore, the quality of financial statements.

Investment Property Accounting in Japanese Companies

As mentioned, several past studies have confirmed the reliability and the usefulness of appraisers' valuations. The previous section described the adoption of the IAS 40 by UR companies and the role of the appraiser's valuation in the investment property accounting system there. Based on the findings, the advantage of using outside appraisers to value investment property appears to be the reliability of the valuation of the property's fair value. This reliability appeals to outsiders. The use of outside appraisers may also decrease the valuation responsibility of company directors.

Large corporations with long histories often possess a wide variety of investment properties with unrealized profits. (19) The number of investors' requests to ensure the reliability of the fair value of investment properties increases as the unrealized profit of the investment property increases. To inform investors of the true value of an investment property, directors of companies use outside appraisers. As the unrealized value of investment property increases, the difference between the book value and the fair value of the investment property increases (i.e., the information asymmetry becomes greater). Therefore, directors of companies have a 19 strong motivation to ease information asymmetry. If the directors of a company provide high-quality information on the fair value of investment property, information asymmetry can be eased to some extent, and financial risks can be reduced. Consequently, the value of the company will increase.

In general, the fair value of investment property is measured through multiple steps, and the number of steps is larger for investment property than for vacant lots. Investment property tends to be arbitrarily measured--in the case of a director's valuation in particular, director's discretionary behavior is a concern. Unlike vacant lots, the fair value of investment property must include building values and profitability. Therefore, a high degree of valuation expertise is needed. Investors acknowledge this and are aware of the usefulness of an appraiser's valuation.

This section presents two hypotheses relating to Japan's investment property accounting. The hypotheses relate to the disclosure of the value of investment property.

* Hypothesis 1: Directors of companies with investment properties with large unrealized profits tend to select an appraiser's valuation.

* Hypothesis 2: Investors recognize the usefulness of an appraiser's valuation.

The validity of Hypothesis 1 (HI) and Hypothesis 2 (H2) correspond to the behavior of directors and the perspectives of investors, respectively. The following section discusses the findings of a study examining each hypothesis.

Disclosure of Fair Value in Japan--Type of Company

A total of 613 companies were extracted from companies listed on the first section of the Tokyo Stock Exchange (TSE). To investigate companies with long-term real estate accumulation, all of the 613 companies were typical large companies in Japan and satisfied the following conditions.

* They were continuously listed on the TSE between fiscal years 1984 and 2011.

* The settlement day was March 31.

* They were not financial institutions.

* They have adopted the Japanese accounting standards.

Table 3 summarizes data on companies in Japan that have adopted the "Accounting Standard for Disclosures about Fair Value of Investment and Rental Property" (ASBJ Statement 20). (20) Of the 613 sample companies, 216 (35.2%) disclosed annotation information in 2010. In Table 3, the investment property (cost)/total assets index indicates the quantity of investment property. Although the average of this index for the 216 companies was 10.6%, the average was 57.5% for companies in the real estate industry. This extremely high value is likely due to the characteristics of this industry, which possesses a large amount of investment property.

An index for investment property unrealized profit and loss/total assets is used to indicate the scale of unrealized profit and loss of the investment property. Although the average of this index for the 216 companies is 6.9%, it is 26.7% for companies in the real estate industry. Again, this extremely high value is probably due to the nature of this industry. There was no significant difference in the average of the investment property unrealized profit and loss/total assets between fiscal years 2010 and 2011. However, in fiscal year 2011 the number of companies possessing investment property, the index for investment property (cost)/total assets (total average), and the index for investment property unrealized profit and loss/total assets (total average) are all slightly smaller than in fiscal year 2010. This was probably due to some companies selling investment property and a long-term decrease in land values.

Table 4 shows the summary of basic statistics for the rental profit and loss/investment property (cost) index for companies with investment property, according to the type of industry. The values of this index indicate the qualitative aspects of investment property. The average values for TSE-listed companies in the manufacturing, and transportation and warehousing industries are above 4.0% and below 5.0%--higher than in any of the other industries. This is probably because many of the investment properties owned in these industries are located in industrial districts with low land values. Consequently, the denominator of this index is relatively small. The minimums of this index for companies in the manufacturing industry and commerce are mainly negative. Thus, some companies appear to have problems with the effective use of investment property. The high standard deviation, particularly in commerce, is noteworthy; it indicates large variations among companies in their effective use of investment property. In contrast, a low standard deviation is observed in the construction, real estate, and transportation and warehousing industries. Therefore, investment property appears to be used effectively in these industries.

Use of Appraisers' Valuations

This section analyzes the use of outside appraisers in the first year of disclosing the market price of investment property. In this analysis logit regression analysis is used. Logit regression analysis is similar to multiple regression analysis, which is often used for factors on real estate value. The difference between these two analyses is that in multiple regression analysis, quantitative data (such as actual property prices) are assigned to variables, but in logit regression analysis, qualitative data (such as 0 and 1) are assigned to variables. (21) Logit regression analysis has many uses, and it has been employed in various fields. For example, in the field of business management, logit regression analysis is used for corporate bankruptcy prediction models. Namely, 1 is assigned to bankrupt companies and 0 is assigned to nonbankrupt companies. In this way, factors peculiar to bankrupt companies can be specified.

In this study, logit regression analysis is first used to verify Hypothesis 1, i.e., directors of companies with investment properties with large unrealized profits tend to select an appraiser's valuation. Data of companies that have adopted an appraiser's valuation and those that have adopted a director's valuation are analyzed to elucidate die characteristics of companies using an appraiser's valuation. Specifically, as expressed by Formula 1, the most noteworthy variable is investment property unrealized profit/total assets (c12). If this variable is certified as significant and positive, the probability of a company adopting the appraiser's valuation increases as the unrealized profit of investment property increases. Consequently, HI can be verified.

In Formula 1, nonuse of an appraiser is assigned a value of 0 and use of an appraiser's valuation is assigned 1, with the resulting formula:

Nonuse and use of outside appraisers =   cl + c2 return on assets
                                         + c3 Tobin's q+ c4 sales
                                           volume percent change
                                         + c5 interest-bearing debt
                                           ratio + c6 natural
                                           logarithm (In) total assets
                                         + c7foreign stock
                                           ownership ratio + c8
                                           shareholding ratio of
                                           financial institutions
                                         + c9 shareholding ratio of
                                           general business
                                           companies + cl 0 land asset
                                           percentage change
                                         + cl 1 investment property/
                                           total assets + cl2
                                           investment property
                                           unrealized profit/total
                                           assets
                                         + cl3 audit corporation
                                           dummy +e (1)


Basic Approach to Definition and Description of the Variables

Table 5 shows the variables employed in Formula 1 and their associated explanations. These variables indicate the scale of possessed investment properly and the unrealized profit ratio as well as the companies' financial and governance strengths.

Information from consolidated financial statements of each company is used for Formula 1. Data for each company, as of March 31, 2009, are used for the variables other than investment property/ total assets and investment property unrealized profit/ total assets. (22) In addition, data on the shareholding ratios are based on values shown in the Nikkei Kaisha Joho data book published by Nikkei Inc.

Of the 613 sample companies listed on the first section of the TSE, 216 companies disclosed information on the fair value of investment property in notes to financial statements in the first fiscal year (2010) of using the accounting standard for disclosures about fair value of investment and rental property. Of the 216 companies, 204 had valuation methods that could be clarified, and these are analyzed. Of the 204 companies, 108 used outside appraisers for the fair value of investment property ("participation"), and 96 employed only a director's valuation ("nonparticipation"). Table 6 shows the analytical results for the 204 companies.

First, the results show that companies with large unrealized profits tend to select outside appraisers. The directors of companies have stronger motivation to transmit accurate asset value information to investors as the unrealized profit increases and information asymmetry becomes greater. Second, companies with large interest-bearing debt ratios tend to select a director's valuation. These companies have a strong tendency to obtain property-backed loans from banks for their business activities. Therefore, these companies have accumulated accurate information on the fair value of collateralized real estate. (23) Thus, information on the value of the collateralized real estate accumulated by these companies may be used for information on the fair value of investment property in the notes to financial statements in the present study. Third, companies with high ratios of foreign stock ownership tend to select a director's valuation. At present, companies appear to have no incentive to provide information on the fair value of investment property to foreign investors by using outside appraisers. (24) Fourth, large companies tended to use outside appraisers. As the total assets of a company increase, the visibility and responsibility of the company increase. Therefore, outside appraisers are used to fulfill the company's public accountability.

The motivation to employ an appraiser's valuation is analyzed according to the type of industry. In the analysis, the companies are divided into two categories: (1) manufacturing, and (2) construction, transportation and warehousing, and real estate. The results for the manufacturing industry tend to approximate those of all the industries. According to the tendency of the coefficient, the construction, transportation and warehousing, and real estate industries are generally the same as industries as a whole. Significance is observed only in the foreign stock ownership ratio. This is probably due to major property companies with large unrealized profits tending to use a director's valuation. (25) In these companies, many employees are qualified appraisers, and these employees are well versed in the real estate held by the companies. These companies likely do not employ external appraisers to protect internal company information. In this way the companies in Japan differ greatly from UR companies with investment property, which put a premium on an appraiser's valuation.

Analysis of the Usefulness of the Appraiser's Valuation

If information on the method of measuring the value of investment property held by a company is useful, investors' expectations will increase. Consequently, the company's stock price will increase. The present study uses an event-study methodology to analyze the relationship between the disclosure of fair value accounting information and short-term stock-price fluctuations.

Of the 204 sample companies in the study that disclose the fair value of investment property, 49 had disclosed annotation information, in accordance with the accounting standard for disclosures, about the fair value of investment property in the statement of accounts (26) between April and May 2010. The possible importance to investors of the disclosure is analyzed.

In the present study, abnormal return (AR) is measured, and cumulative abnormal return (CAR) is obtained, using the following formula measuring value:

[R.sub.it] = [[alpha].sub.i] + [[beta].sub.i][R.sub.mt] / [[epsilon].sub.it],

where [R.sub.it] represents the return of company i at day t, [R.sub.mt] represents the return on the market portfolio at day t (the Tokyo Stock Price Index was used in the present study), [[alpha].sub.i] and [[beta].sub.i] represent the parameters for the linear regression model, and [[epsilon].sub.it] represents an error term.

The values of [[alpha].sub.i] and [[beta].sub.i] were estimated from the time-series data of [R.sub.it] and [R.sub.mt] using the least-squares method. (27) Using the estimated values, the estimated value of the abnormal return [[epsilon].sub.it] was obtained as follows:

[[epsilon].sub.it] = [R.sub.it] - ([[alpha].sub.i] + [[beta].sub.i] [R.sub.mt])

This formula is based on the assumption that the return of a company is determined by linking it to the return of the entire market. In this formula, [[alpha].sub.i] + [[beta].sub.i] [R.sub.mt] is the estimated return of a company based on the return of the entire market. However, this is only a theoretical value. Therefore, this does not always agree with the actual return (realized value). This analytical method focuses on the percentage of deviation between the realized value and the theoretical value. If a company discloses highly useful information to investors, this information affects the investors' actions. Consequently, the company's stock price may unexpectedly fluctuate. This increases the percentage of deviation between the realized value and the theoretical value. The increase in the percentage of deviation is expressed as AR in Formula 2. Therefore, the absolute value of CAR increases as the usefulness of the information disclosed by a company increases. Thus, CAR can be used as a scale to measure the usefulness of information disclosed by a company.

In the present study, the CAR for 10 days before and after the release date of the statement of accounts (20-day period) is analyzed. To verily the average effect of the release of the statement of accounts at day t, the AR is obtained as follows, where the number of sample companies is n:

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII] (2)

To verify the average effect of the release of the statement of accounts during the analytical period, CAR in the period between t = a and b is measured as follows:

[MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII]

Subsequently, regression analysis is performed using CAR as the explanatory variable based on the following model:

CAR (a, b) = [a.sub.1] + [a.sub.2] investment property unrealized profit per share + [a.sub.3] earnings forecast dispersion per share + [a.sub.4] dummy valuation method + [epsilon] (3)

In Formula 3, investment property unrealized profit per share ([a.sub.2]) is obtained by calculating the unrealized profit of the investment property based on annotation information from each company and then dividing the obtained value by all issued stocks. Earnings forecast dispersion per share ([a.sub.3]) is obtained by deducting the latest earnings forecast from the earnings published in the statement of accounts and then dividing the obtained value by all issued stocks. To obtain the valuation dummy, 1 was assigned to the case where outside appraisers participated in the appraisal of fair value of the investment property, and 0 is assigned to the case where a director's valuation is used, based on annotation information from each company. When [a.sub.2] and [a.sub.4] are significant coefficients, the correlation among the investment property unrealized profit per share, the dummy valuation method, and CAR is confirmed, and the annotation information can be considered useful.

Figure 1 shows the temporal changes in the CAR, that is, the averages of the 49 companies that use either an appraiser's valuation or a director's valuation. As shown in this figure, the value of CAR increases around the release date of the statement of accounts for companies using an appraiser's valuation, and this increase continues for three days. For companies using a director's valuation, the CAR tends to decrease after the release date. Table 7 shows that there is a significant difference in the CAR between the appraiser's valuation and the director's valuation. The difference in the valuation methods can be assumed to be correlated with stock-price fluctuations. To elucidate the correlation quantitatively, a cross-sectional analysis was performed using Formula 3.

Table 8 displays the results obtained using the cross-sectional analysis. As shown in this table, the coefficients of investment property unrealized profit per share ([a.sub.2]) and dummy valuation method ([a.sub.4]) are always positive. Therefore, the share price increases as the unrealized profit of investment property increases, and this increase is statistically significant.

Regarding the valuation method, the share price increases when outside appraisers are used. Therefore, regarding the valuation of investment property, the results show that investors consider the identity of the valuer important.

Conclusion

This article has examined two hypotheses regarding appraisers' valuations in financial reporting of investment property value.

Hypothesis 1 suggested that directors of companies with investment properties with large unrealized profits tend to select an appraiser's valuation. As shown in Table 6, the directors of companies in the manufacturing industry in Japan tend to select appraisers' valuations when the unrealized profit of the investment property is large. This is because directors recognize the usefulness of unrealized profit information, and they are strongly motivated to transmit accurate asset value information to their investors. Therefore, Hypothesis 1 has been verified in the manufacturing industry. However, this tendency was not observed in the real estate industry. This is probably due to companies in this industry having a strong tendency to use a director's valuation. These Japanese companies differ greatly from property companies in the United Kingdom, which put a premium on an appraiser's valuation. Thus, whether the strong tendency to use a director's valuation is accepted by investors in the international economic community is a topic for the future by future research.

Hypothesis 2 suggested that investors recognize the usefulness of an appraiser's valuation. As shown in Figure 1, and Tables 7 and 8, investors recognized the usefulness of information on the difference between the appraiser's valuation and the director's valuation. Therefore, Hypothesis 2 has been verified.

Typical large companies in Japan often possess large numbers and various types of investment properties. Information asymmetry on investment properties is assumed to be greater in large companies than in medium and small companies. Therefore, directors of the companies and investors both value the accuracy and the reliability of appraisers' valuations performed by outside specialists.

In the International Financial Reporting Standards, investment properties are ranked as assets where the fair values are difficult to grasp. As such, an appraiser's valuation can play a role in Japan and follow the example of more than 90% of European companies that have adopted appraisers' valuations for the fair value of investment property. (28)

In this article, the role and the importance of appraisers' valuations have been clarified in investment property accounting. Appraisers' valuations can be expected to contribute to future investment property accounting. The results obtained in the present study support those of previous studies, which verified the usefulness of appraisers' valuations. Although the number of countries examined in the present study is limited, it makes an important contribution to the literature by identifying problems with information asymmetry in investment property and illustrating how these may be resolved by qualified professional appraisers. It is hoped that studies similar to the present one will be performed in other countries to further verify the usefulness of appraisers' valuations. The results obtained in such studies can be expected to further support the activities of appraisers in investment property fair value accounting. The accumulation of solid research studies on appraisers' valuations will raise the position of appraisers in the international economic community and contribute to the development of the real estate appraisal industry.

Web Connections

Internet resources suggested by the Y T. and Louise Lee Lum Library

Accounting Standards Board of Japan and Financial Accounting Standards Foundation

https://www.asb.or.jp/asb/top_e.do

American Institute of Certified Public Accountants (AICPA)

--AICPA IFRS Resources

http://www.ifrs.com/

--Journal of Accountancy--IFRS Resources

http://www.journalofaccountancy.com/Web/IFRS

Deloitte Global Services--Standards Resources

http://www.iasplus.com/en/standards

Ernst & Young--Applying IFRS to Real Estate: Fair Value Measurement

http://www.ey.com/Publication/vwLUAssets/Applying_IFRS_in_Real_Estate/$FILE/Applying_RealEstate.pdf

FASB Accounting Standards Codification (free registration required)

http://ascfasb.org/

Financial Accounting Standards Board (FASB)

http://www.fasb.org/home

Financial Reporting Council (UR)

https://www.frc.org.uk/

IFRS Foundation and International Accounting Standards Board (IASB)

http://www.ifrs.org/Pages/default.aspx

International Valuation Standards Council

http://www.ivsc.org/

PricewaterhouseCoopers

--IFRS Updates

http://www.pwc.com/gx/en/ifrs-reporting/technical-updates.jhtml

--Fair Value Measurement

http://www.pwc.com/us/en/cfodirect/issues/fair-value/index.jhtml

by Takashi Yamamoto, PhD

(1.) In the United States, the Financial Accounting Standards Board (FASB) is the designated organization in the private sector for establishing standards of financial accounting that govern the financial reports by nongovernmental organizations. These standards are officially recognized by the Securities and Exchange Commission and the American Institute of Certified Public Accountants.

(2.) Japanese accounting standards define investment property as "not a property classified in an inventory but one that has been purchased with the intention of earning a return on the investment, either through rent, the future resale of the property or both"; this is similar to the definition of investment property in International Accounting Standard 40.

(3.) George A. Akerlof, "The Market for 'Lemons': Quality Uncertainly and the Market Mechanism," Quarterly Journal of Economics 84, no. 3 (August 1970): 488-500.

(4.) In Japan, an appraiser's valuation is generally performed by specialists who are recognized as appraisers by the government.

(5.) IFRS 13 (9).

(6.) The Statements of Standard Accounting Practice (SSAP) are issued by the UK Accounting Standards Board. SSAP 19 is available at https://frc.org.uk/Our-Work/Publications/ASB/SSAP-19-Accounting-for-investment-properties/SSAP-19-Accounting-for-investment-properties.aspx.

(7.) This is an accounting processing method based on the IAS 40.33-40.55 where the change in the fair value of an investment property in every quarter is reflected in a statement of profit and loss.

(8.) This is an accounting processing method based on the IAS 40.56 that does not greatly differ from conventional methods, although the fair value of an investment property is disclosed in notes to financial statements.

(9.) In the exposure draft, only the fair value model was included. However, because of dissent from Japan and other countries, the cost model was added. The full content of IAS 40 is available at http://ec.europa.eu/internal_market/accounting/docs/consolidated/ias40_en.pdf.

(10.) IVS Framework 40, in International Valuation Standards 2011 (London: International Valuation Standards Council, 2011), 23.

(11.) IVS Framework 30, Ibid., 20.

(12.) J. Richard Dietrich, Mary S. Harris, and Karl A. Muller III, "The Reliability of Investment Property Fair Value Estimates," Journal of Accounting and Economics 30, no. 2 (October 2000): 125-158.

(13.) Karl A. Muller III, and Edward J. Riedl, "External Monitoring of Property Appraisal Estimates and Information Asymmetry," Journal of Accounting Research 40, no. 3 (2002): 865-881.

(14.) Karl A. Muller III, Edward J. Riedl, and Thorsten Sellhorn, "Mandatory Fair Value Accounting and Information European Real Estate Industry Asymmetry: Evidence from the European Real Estate Industry," Management Science 57, no. 6 (2011): 1138-1153.

(15.) Philip Brown, H. Y. Izan, and Alfred L. Loh, "Fixed Asset Revaluations and Managerial Incentives," ABACUS 28, no. 1 (1992): 36-57.

(16.) Julie Cotter and Ian Zimmer, "Asset Revaluations and Assessment of Borrowing Capacity," ABACUS 31, no. 2 (1995): 136-151.

(17.) Julie Cotter and Scott Richardson, "Reliability of Asset Revaluations: The Impact of Appraiser Independence," Review of Accounting Studies 7, no.4 (2002): 435-457.

(18.) Takashi Yamamoto, "Asset Impairment Accounting and Appraisers: Evidence from Japan," The Appraisal Journal 76, no. 2 (Spring 2008): 179-188.

(19.) In this article, unrealized profit means the difference between the fair value of investment property and its acquisition cost when the former is larger than the latter.

(20.) The Accounting Standards Board of Japan (ASBJ) approved Statement 20 in 2008, and the standard applies to fiscal years ending on or after March 31, 2010, although companies may have adopted it earlier; see https://www.asb.or.jp/asb/asb_e/technical_topics_reports/fudosan-kaiji/fudosan-kaiji_as.pdf.

(21.) A logit model is a stochastic alignment model comprising a combination of variables x (r pieces) as Z = [[beta].sub.0] + [[beta].sub.1][x.sub.1] + [[beta].sub.2][x.sub.2] + ... + [[beta].sub.1][x.sub.r]. The stochastic alignment model does not guarantee that the presumed probability is 0 or 1. To store this presumed probability between 0 and 1, logit conversion is carried out, and the above-mentioned alignment combination is presented as follows: p(x) = exp(z)/(1+exp(z)) = 1/(1+exp(-z)). When this is transformed, it appears as log p(x)/(1-p(x)) = [[beta].sub.0] + [[beta].sub.1][x.sub.1] + [[beta].sub.2][x.sub.2] + ... + [[beta].sub.r][x.sub.r]. Thereby, P can be presumed.

(22.) The companies used outside appraisers in fiscal year 2009, and methods of decision making are considered to be closely related to the data as of March 31, 2009.

(23.) This may be because Japan's Financial Services Agency instructed the banks to strictly value collateralized real estate by adopting the capitalization method.

(24.) This may be because foreign investors not properly understand Japan's real estate valuation systems (such as information systems for public land appraisals, property tax assessment systems, and appraisal systems) and because there is insufficient basic information for decision making.

(25.) The top three property companies with large investment property used the director's valuation.

(26.) The statement of accounts is a document in which financial statements are summarized. As the statement of accounts is published prior to the disclosure of financial statements, investors attach importance to it.

(27.) The values of [[alpha].sub.i] and [[beta].sub.j] were estimated based on stock price data between days -100 and -11.

(28.) According to a survey conducted by Ernst & Young in 2010, of thirty European property companies, only two-companies adopted the director's valuation.

Takashi Yamamoto, PhD, is an associate professor with the Department of Real Estate Sciences at Meikai University in Japan. He has more than 25 years of appraisal experience. He is interested in real estate accounting and has written many articles in accounting and real estate journals. He holds a PhD in economics from Saitama University.

Contact: takashiyamamoto1961@yahoo.co.jp

Table 1 Investment Property Accounting in General Business Companies
in the United Kingdom

Table la General Business Companies in FTSE 350 Adopting IAS 40

                                Number of
                    Total    Sample to Adopt
Type of Industry   Samples     the IAS 40

Resources             44        1 (2.27%)
Construction          12        1 (8.33%)
Manufacturing         54        1 (1.85%)
Commerce              29       7 (24.14%)
Real estate            4       3 (75.00%)
Transportation         3       1 (33.33%)
Energy                 1        0 (0.00%)
Service               71        3 (4.23%)
Communication         20        1 (5.00%)
Military               8       2 (25.00%)

Total                246       20 (8.13%)

                           Investment Property/Total Assets

                                                          Standard
Type of Industry   Average   Median   Maximum   Minimum   Deviation

Resources           0.000    0.000     0.000     0.000         --
Construction        0.006    0.006     0.006     0.006         --
Manufacturing       0.003    0.003     0.003     0.003         --
Commerce            0.023    0.013     0.078     0.002      0.028
Real estate         0.722    0.823     0.904     0.438      0.249
Transportation      0.004    0.004     0.004     0.004         --
Energy                 --       --        --        --         --
Service             0.011    0.003     0.030     0.001      0.017
Communication       0.005    0.005     0.005     0.005         --
Military            0.005    0.005     0.005     0.004      0.000

Total               0.119    0.005     0.904     0.000      0.273

Note: This table was created based on the accounting figures in the
latest annual reports as of February 1, 2011.

Table 1b Valuation Models, General Business Companies in FTSE 350
Adopting IAS 40

                                               Valuation Models
                   Number of Sample to Adopt
Type of Industry          the IAS 40           Fair Value   Cost

Resources                      1                   1
Construction                   1                             1
Manufacturing                  1                             1
Commerce                       7                   3         4
Real estate                    3                   3
Transportation                 1                             1
Energy                         0
Service                        3                   2         1
Communication                  1                   1
Military                       2                   2

Total                         20                  12         8

Table 1c Valuation Methods of Fair Value Model, General Business
Companies in FTSE 350 Adopting IAS 40

                    Valuation Methods of the Fair Value Model

Type of Industry   Appraiser's Valuation   Director's Valuation

Resources                    1
Commerce                     1                      2
Real estate                  3
Service                      1                      1
Communication                                       1
Military                     1                      1

Total                        7                      5

Table 2 Investment Property Accounting in Financial Institutions in
the United Kingdom

Table 2a Financial Institutions in FTSE 350 Adopting IAS 40

                                 Number of
                     Total    Sample to Adopt
Type of Industry    Samples     the IAS 40

REIT                   15      15 (100.00%)
Life insurance          8       8 (100.00%)
Nonlife insurance       8        1 (12.50%)
Others                 79         5 (6.33%)

Total                 110       29 (26.36%)

                            Investment Property/Total Assets

                                                           Standard
Type of Industry    Average   Median   Maximum   Minimum   Deviation

REIT                 0.756    0.874     0.986     0.312      0.211
Life insurance       0.028    0.025     0.049     0.011      0.015
Nonlife insurance    0.018    0.018     0.018     0.018         --
Others               0.011    0.009     0.018     0.005      0.006

Total                0.401    0.312     0.986     0.005      0.403

Table 2b Valuation Models, Financial Institutions in FTSE 350
Adopting IAS 40

                                                Valuation Models
                    Number of Sample to Adopt
Type of Industry           the IAS 40           Fair Value   Cost

REIT                           15                   14        1
Life insurance                  8                    8
Nonlife insurance               1                    1
Others                          5                    5

Total                          29                   28        1

Table 2c Valuation Methods of Fair Value Model, Financial
Institutions in FTSE 350 Adopting IAS 40

                      Valuation Methods of the Fair Value Model

Type of industry     Appraiser's Valuation   Director's Valuation

REIT                          14
Life insurance                 4                      4
Non life insurance                                    1
Others                         4                      1

Total                         22                      6

Table 3 Profile of TSE Companies Adopting Disclosure of Fair Value,
Fiscal Years 2010 and 2011

Fiscal Year 2010                 Samples
                                  with
                      Total    Investment
Type of Industry     Samples    Property

Agriculture,             4       2 (50.0%)
forestry, fishery,
and mining

Construction            36      23 (63.8%)

Manufacturing          465     129 (27.7%)

Commerce                43      18 (41.9%)

Real estate              7       6 (85.7%)

Transportation and      38      27 (71.1%)
warehousing

Energy                  12       4 (33.3%)

Service                  8       7 (87.5%)

Total                  613     216 (35.2%)

Fiscal Year 2011

Agriculture,             4       2 (50.0%)
forestry, fishery,
and mining

Construction            36      21 (58.3%)

Manufacturing          465     128 (27.5%)

Commerce                43      19 (44.2%)

Real estate              7       6 (85.7%)

Transportation and      38      27 (71.1%)
warehousing

Energy                  12       3 (25.0%)

Service                  8       7 (87.5%)

Total                  613     213 (34.7%)

Fiscal Year 2010         Investment Property (Cost)/Total Assets

                                                            Standard
Type of Industry     Average   Median   Maximum   Minimum   Deviation

Agriculture,          0.181    0.181     0.318     0.044      0.194
forestry, fishery,
and mining

Construction          0.078    0.065     0.184     0.018      0.045

Manufacturing         0.076    0.043     0.702     0.000      0.098

Commerce              0.088    0.068     0.248     0.009      0.065

Real estate           0.575    0.638     0.849     0.181      0.224

Transportation and    0.161    0.097     0.531     0.021      0.131
warehousing

Energy                0.058    0.061     0.093     0.017      0.032

Service               0.170    0.174     0.236     0.084      0.056

Total                 0.106    0.063     0.849     0.000      0.131

Fiscal Year 2011

Agriculture,          0.165    0.165     0.285     0.045      0.170
forestry, fishery,
and mining

Construction          0.097    0.079     0.213     0.024      0.055

Manufacturing         0.077    0.044     0.793     0.000      0.104

Commerce              0.080    0.058     0.258     0.009      0.067

Real estate           0.594    0.623     0.797     0.297      0.171

Transportation and    0.162    0.126     0.558     0.021      0.131
warehousing

Energy                0.046    0.047     0.073     0.018      0.028

Service               0.168    0.159     0.268     0.082      0.063

Total                 0.108    0.066     0.797     0.000      0.135

                                   Investment Property
Fiscal Year 2010         Unrealized Profit and Loss/Total Assets

                                                            Standard
Type of Industry     Average   Median   Maximum   Minimum   Deviation

Agriculture,          0.078    0.078     0.143     0.013      0.092
forestry, fishery,
and mining

Construction          0.018    0.006     0.088    -0.019      0.027

Manufacturing         0.057    0.027     0.602    -0.077      0.093

Commerce              0.029    0.011     0.171    -0.023      0.046

Real estate           0.267    0.193     0.585     0.050      0.210

Transportation and    0.142    0.062     0.692    -0.000      0.186
warehousing

Energy                0.068    0.042     0.161     0.026      0.063

Service               0.116    0.084     0.284    -0.028      0.122

Total                 0.069    0.030     0.692    -0.077      0.116

Fiscal Year 2011

Agriculture,          0.073    0.073     0.134     0.012      0.086
forestry, fishery,
and mining

Construction          0.016    0.005     0.111    -0.024      0.030

Manufacturing         0.055    0.029     0.602    -0.074      0.093

Commerce              0.025    0.005     0.187    -0.025      0.048

Real estate           0.245    0.196     0.466     0.041      0.178

Transportation and    0.129    0.061     0.615     0.001      0.167
warehousing

Energy                0.070    0.042     0.132     0.038      0.053

Service               0.107    0.081     0.260    -0.038      0.118

Total                 0.066    0.030     0.615    -0.074      0.110

Note: The investment property (cost)/total assets and the investment
property unrealized profit and loss/total assets were obtained from
companies that have disclosed information of the market value of
investment property in notes to financial statements.

Table 4 Rental Profit and Loss/Investment Property (Cost) of TSE
Companies Adopting Disclosure of Fair Value, Fiscal Years 2010 and
2011

                                 Fiscal Year 2010

Type of                                                 Standard
Industry         Average   Median   Maximum   Minimum   Deviation

Agriculture,      0.032    0.032     0.047     0.018      0.020
forestry,
fishery, and
mining

Construction      0.032    0.033     0.064    -0.010      0.015

Manufacturing     0.040    0.042     0.132    -0.029      0.024

Commerce          0.030    0.040     0.082    -0.104      0.038

Real estate       0.033    0.032     0.040     0.026      0.005

Transportation    0.046    0.043     0.107     0.004      0.021
and
warehousing

Energy            0.024    0.024     0.040     0.006      0.014

Service           0.031    0.042     0.050     0.001      0.020

Total             0.038    0.039     0.132    -0.104      0.024

                                 Fiscal Year 2011

Type of                                                 Standard
Industry         Average   Median   Maximum   Minimum   Deviation

Agriculture,      0.038    0.038     0.054     0.021      0.023
forestry,
fishery, and
mining

Construction      0.035    0.030     0.097     0.003      0.019

Manufacturing     0.042    0.042     0.110    -0.007      0.025

Commerce          0.032    0.041     0.085    -0.095      0.037

Real estate       0.030    0.030     0.036     0.025      0.004

Transportation    0.045    0.040     0.094     0.005      0.017
and
warehousing

Energy            0.026    0.028     0.039     0.007      0.013

Service           0.034    0.046     0.053     0.004      0.020

Total             0.039    0.038     0.110    -0.095      0.025

Note: In fiscal years 2010 and 2011, 216 and 213 companies were
analyzed, respectively. The rental profit and loss were obtained by
deducting the rental cost from the rental profit and did not include
the profit and loss on the disposition of fixed assets and the
impairment loss.

Table 5 Description of Explanatory Variables

Variable                            Basic Approach

ROA                                 Companies with high profitability
                                    are considered able to bear the
                                    high costs of using outside
                                    appraisers.

Tobin's q                           This value is obtained by adding
                                    the book value of the debt to the
                                    market capitalization and
                                    dividing the obtained value by
                                    the total book value of the
                                    assets. Companies with strong
                                    business performances can afford
                                    to bear high costs.

Sales volume percent change         The sales volume percent change
                                    in the past four years is used.
                                    Companies with high growth rates
                                    can afford to bear high costs.

Interest-bearing debt ratio         This ratio focuses on interest
                                    payments. The relationship with
                                    banks is stronger as this ratio
                                    increases.

Ln total assets                     The natural logarithm
                                    transformation of the total
                                    assets is used. As the total
                                    assets of a company increase, the
                                    social visibility and the
                                    accountability of the company
                                    increase.

Foreign stock ownership ratio       Companies with a high foreign
                                    stock ownership ratio are
                                    strictly observed and regulated
                                    by outsiders. Therefore, these
                                    companies must shoulder a heavy
                                    burden of accountability to
                                    outsiders.

Shareholding ratio of financial     Companies with a high
institutions                        shareholding ratio of financial
                                    institutions are strictly
                                    observed and regulated by
                                    financial institutions.
                                    Therefore., these companies must
                                    shoulder a heavy burden of
                                    accountability to financial
                                    institutions.

Shareholding ratio of general       Regarding companies with a high
business companies                  shareholding ratio of general
                                    business companies, external
                                    accountability decreases as
                                    cross-shareholdings increase.

Land asset percentage change        This variable indicates the
                                    changes in the land assets of a
                                    company in the period between
                                    fiscal years 1984 and 2003. As
                                    this value increases, the company
                                    invests more heavily in real
                                    estate, and the number of people
                                    engaged in the investment
                                    increases.

Investment property/total assets    This variable indicates the
                                    degree of dependence of the total
                                    assets on the investment property
                                    (cost). The number of people
                                    engaged in investment property
                                    increases as this value
                                    increases.

Investment property unrealized      This variable indicates the
profit/total assets                 degree of dependence of the total
                                    assets on the unrealized profit
                                    of the investment property. The
                                    unrealized profit and loss was
                                    obtained based on information
                                    disclosed in notes to financial
                                    statements. The unrealized profit
                                    is used more effectively as this
                                    value increases. Therefore, this
                                    variable has an important meaning
                                    in corporate management. A
                                    company with a large value of
                                    this variable must shoulder a
                                    heavy burden of accountability to
                                    stakeholders in the company.

Audit corporation dummy             This is a dummy variable related
                                    to the scale of an audit of the
                                    company. In Formula 1, 1 is
                                    assigned to three major audit
                                    corporations, Ernst & Young
                                    ShinNihon LLC, Deloitte Touche
                                    Tohmatsu LLC, and KPMG AZSA LLC,
                                    and 0 is assigned to other audit
                                    corporations. As major audit
                                    corporations perform strict
                                    audits, the use of real estate
                                    appraisers is facilitated.

Table 6 Formula 1 Analytical Results, Use of Appraisers' and
Directors' Valuations, TSE Companies Adopting Disclosure of Fair
Value

                                   Total

Variable              Coefficient        f-value

Constant                -9.723          -2.163 **

ROA                     -3.945          -1.071

Tobin's q                0.977           0.891

Sales volume             0.102           0.230
percent change

Interest--bearing       -3.108          -2.686 ***
debt ratio

Ln total assets          0.373           2.029 **

Foreign stock           -0.063          -2.706 ***
ownership ratio

Shareholding             0.006           0.289
ratio of financial
institutions

Shareholding ratio      -0.007          -0.519
of general business
companies

Land asset               0.029           1.588
percentage change

Investment               0.428           0.246
property/total
assets

Investment               4.304           2.097 **
property unrealized
profit/total assets

Audit corporation        0.257           0.702
dummy

Log likelihood        -129.635

[x.sup.2]              22.827

N                      204           participation:
                                          108,
                                    nonparticipation:
                                           96

                               Manufacturing

Variable              Coefficient        f-value

Constant              -19.572           -2.620 ***

ROA                    -8.598           -1.801 *

Tobin's q               0.620            0.518

Sales volume            1.077            1.470
percent change

Interest--bearing      -4.824           -2.801 ***
debt ratio

Ln total assets         0.711            2.292 **

Foreign stock          -0.072           -2.239 **
ownership ratio

Shareholding            0.019            0.614
ratio of financial
institutions

Shareholding ratio     -0.013           -0.643
of general business
companies

Land asset              0.020            1.134
percentage change

Investment              8.164            2.074 **
property/total
assets

Investment             12.897            3.026 ***
property unrealized
profit/total assets

Audit corporation       0.274            0.518
dummy

Log likelihood        -65.214

[x.sup.2]             37.878

N                     122            participation:
                                           66,
                                    nonparticipation:
                                           56

                       Construction, Transportation,
                             and Warehousing,
                              and Real Estate

Variable              Coefficient        f-value

Constant              -15.266           -1.333

ROA                    51.249            1.634

Tobin's q               0.632            0.194

Sales volume            0.901            0.327
percent change

Interest--bearing      -1.711           -0.544
debt ratio

Ln total assets         0.605            1.250

Foreign stock          -0.125           -1.833 *
ownership ratio

Shareholding           -0.038           -0.771
ratio of financial
institutions

Shareholding ratio     -0.001           -0.017
of general business
companies

Land asset              0.014            0.399
percentage change

Investment              0.616            0.169
property/total
assets

Investment              1.332            0.410
property unrealized
profit/total assets

Audit corporation       0.178            0.166
dummy

Log likelihood        -28.874

[x.sup.2]              15.706

N                      53            participation:
                                           27,
                                    nonparticipation:
                                           26

Note: * 10% significance, ** 5% significance, *** 1% significance. In
this table, 1 was assigned to samples when outside appraisers were
used and 0 was assigned to samples when director's valuation was
adopted.

Table 7 Difference in Cumulative Abnormal Return (CAR) between
Appraisers' and Directors' Valuation

             Appraiser's Valuation   Director's Valuation

CAR(-2,2)            0.018                  -0.018
CAR(-2,5)            0.008                  -0.034
CAR(-2,10)          -0.001                  -0.039

             Difference of Means   Mann-Whitney Test
               Test (p-value)          (p-value)

CAR(-2,2)           0.023                0.037
CAR(-2,5)           0.033                0.029
CAR(-2,10)          0.086                0.104

Table 8 Results, Regression Analysis Cumulative Abnormal Return (CAR)
Variable

Analytical model: CAR = [a.sub.1] + [a.sub.2] investment property
unrealized profit per share + [a.sub.3] earnings forecast dispersion
per share + [a.sub.4] dummy valuation method

Explained
variables   [a.sub.1]    f-value     [a.sub.2]    f-value    [a.sub.3]

CAR(-1,0)    -0.012     -1.560         0.000     2.385 **      0.000
CAR(-1,1)    -0.030     -2.449 **      0.000     2.254 **      0.000
CAR(0,1)     -0.025     -2.137 **      0.000     1.841 *       0.000
CAR(-2,0)    -0.011     -1.227         0.000     2.202 **      0.001
CAR(-2,1)    -0.029     -2.364 **      0.000     2.357 **      0.000
CAR(-2,2)    -0.036     -2.862 ***     0.000     2.801 ***     0.000
CAR(-5,5)    -0.050     -3.251 ***     0.000     3.451 ***    -0.000

Explained
variables   f-value    [a.sub.4]    f-value    adj. [R.sup.2]

CAR(-1,0)    1.612       0.023     2.525 **        0.195
CAR(-1,1)    0.736       0.040     2.758 ***       0.192
CAR(0,1)     0.293       0.036     2.537 **        0.159
CAR(-2,0)    2.202 **    0.028     2.730 ***       0.217
CAR(-2,1)    1.317       0.045     3.154 ***       0.228
CAR(-2,2)    0.564       0.045     2.984 ***       0.239
CAR(-5,5)   -0.223       0.042     2.319 **        0.261

Note: * 10% significance, ** 5% significance, *** 1% significance.
The numbers in the parentheses accompanying the CAR indicate the
period of the cumulative AR when the release date of the statement of
accounts is expressed as "0." For example, CAR (-2, 2) indicates that
the AR in the period two days before and after the release date has
been cumulated.
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