External monitoring of property appraisal estimates and information asymmetry

Karl A. Muller, Edward J. Riedl

Research output: Contribution to journalArticle

63 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)865-881
Number of pages17
JournalJournal of Accounting Research
Volume40
Issue number3
DOIs
StatePublished - Jun 2002

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics

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