Premium
External Monitoring of Property Appraisal Estimates and Information Asymmetry
Author(s) -
Muller III Karl A.,
Riedl Edward J.
Publication year - 2002
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/1475-679x.00074
Subject(s) - information asymmetry , market liquidity , business , audit , asset (computer security) , reliability (semiconductor) , cost of capital , value (mathematics) , sample (material) , market value , investment (military) , differential (mechanical device) , finance , accounting , actuarial science , economics , microeconomics , incentive , computer security , law , chemistry , computer science , engineering , power (physics) , chromatography , quantum mechanics , machine learning , political science , physics , politics , aerospace engineering
Finance theory proposes that firms’ cost of capital increases when market makers set wider spreads due to perceived higher information asymmetry across traders. Using a sample of UK investment property firms and controlling for firms’ non‐random selection of external monitors, we find evidence that market makers perceive information asymmetry across traders to be lower for firms employing external appraisers versus those employing internal appraisers. This evidence is consistent with liquidity‐motivated traders being unable to overcome such reliability differences using asset value information from sources other than accounting. We fail to find a similar difference for firms employing Big 6 versus non‐Big 6 auditors. Our findings contribute to the debate over the recognition of fair value estimates for long‐lived tangible assets by documenting that reliability differences attributable to differential monitoring by appraisers can affect information asymmetry, and therefore firms’ cost of capital.