Mark-to-Market Accounting and Valuation : Evidence from UK Real Estate and Investment Companies

The accounting for British investment vehicles is idiosyncratic, but requires that investment assets are marked to market. This allows us to study valuation relevance of accounting according to industry specific GAAP for real estate and investment companies, which is not historic cost, and estimates for historic cost and mark-to-market accounting. We find that the revaluation of investment assets from cost to market is highly significant in both industries - in contrast to earlier US evidence. For both industries, the valuation impact of earnings, however measured, is low in comparison to that found in earlier studies of non-financial firms. This is as expected, given that profits earned in efficient capital markets are likely to be transient. Of the three earnings measures, the GAAP version, which includes the lowest proportion of transient investment returns, shows the largest coefficient estimates. More important is the apparent over-valuation of investment assets in the companies' accounts. We find both the real estate and investment companies to typically trade at substantial discount to their mark-to-market asset values. Our approach to investigating this puzzle is relatively novel, but although we can explain part of the real estate discount, our evidence does not help to explain the discount on investment trusts