Is fair value information fairly priced? Evidence from IPOs in global capital markets^✰

We study how the information conveyed by fair value (FV) reporting is considered during an initial public offering (IPO). By examining how pre-IPO FV earnings are perceived by underwriters and investors, we document numerous original findings. First, IPOs with higher FV earnings have higher initial valuations and subsequent price revisions, indicating that underwriters and institutional investors value the information conveyed by FV reporting. Second, there is a significantly negative relation between FV earnings and post-IPO initial returns, whereas no such relation exists between non-FV earnings and initial returns. Third, we document robust positive associations between FV earnings and various measures of post-issue long-run stock performance. Fourth, we confirm the informational content of FV earnings by showing their predictive power for future earnings. We interpret these findings as supportive of the underreaction hypotheses, whereby aftermarket investors underreact to the information contained in FV reporting in the short run and gradually recognize the value of such information in the long run. We perform numerous tests to confirm the robustness of our results, including a test to address potential sample selection bias using the adoption of IFRS for small- and medium-sized entities (SMEs) as an exogenous determinant of FV reporting. Taken together, our findings advance our understanding of how fair value information is considered during an IPO issuance.