IMPACT OF FAIR VALUE MEASUREMENT ON CORPORATE INVESTMENT: OTHER COMPREHENSIVE INCOME

Abstract

Fair value measurement (FVM) has been criticized for its pro-cyclical effect, especially during the financial crisis of 2008. In this study, we extend the concept of pro-cyclicality to business firms and explore whether and how such FVM affects corporate investment. Specifically, we use other comprehensive income (OCI) as an aggregated metric of fair value adjustments and regard this as a potential financing constraint on investment. In a sample of Japanese listed firms, we find that negative OCI in particular, negative OCI on foreign currency translations results in lower capital investment. Moreover, we report that a decline in foreign currency translations is more likely to inhibit a firmʼs over-investment rather than to encourage under-investment. Overall, our findings suggest that FVM provides timely and useful information to managers in terms of their investment decision-making.