The Effect of Gains/Losses from Changes in Fair Value of

Financial Instruments on the Value Relevance and

Risk for Investor

Rini Indriani

1,*

, Eddy Suranta

, Lara Carina

, and Asikum Wirataadmaja

Fakulty of Economics and Bussines, University of Bengkulu, Bengkulu, Indonesia

Fakulty of Economics and Bussines, Universitas Kristen Maranatha, Indonesia

Abstract. The aims this study is to determine the effect of disclosure gains /

losess changes in fair value of financial instruments on stock returns and beta

shares of the company. Based on the sampling method used in this research is

purposive sampling obtained a sample of 54 financial companies listed on the

Indonesia Stock Exchange. Furthermore, the data were analyzed using panel data

regression using a fixed effect and multiple linear regression. The results of the

research can prove that the information gains / losses changes in fair value of

financial instrument has significant positive effect on return, and a significant

negative effect on the company's stock beta. This result shows that the

information gains / losses changes in fair value of financial instrument has value

relevance and can reduce the risk for investors. Based on these results, indicated

that gains / losses changes in fair value of financial instruments is information

that can change the decisions of investors.

Keywords: Gains ꞏ Financial ꞏ Instruments ꞏ Value relevance ꞏ Risk relevance

1 Introduction

The adoption of standards regarding fair value accounting requires companies to assess

each financial instrument owned based on the standards issued by DSAK. Valuation

based on fair value results in the company having to recognize the gains/losses caused

by changes in fair value and reported in the company's income statement that will have

an impact on the reported profits of the company. Thus, it raises the question whether

the information regarding gains/losses due to changes in the fair value of financial

instruments becomes relevant information for investors or vice versa.

Information conveyed by companies through financial statements such as reporting

gains/losses on changes in the fair value of financial instruments is a signal to market

participants. Where, in signal theory it is stated that these signals will be captured by

market participants and reflected in the company's stock price (Arifin, 2007). Nursiah

and Nuryani (2014) and Yong et al. (2012) states that gains/losses in changes in fair

value provide a positive signal for investors in estimating the volatility of company

profits. This shows that information on profit/loss on changes in fair value has value

that is relevant to investors in making decisions and risks for investors. Barth et al

(1996) also revealed that gains and losses at fair value become relevant value when an

entity's risk increases. Penman (2011) in Nursiah and Nuryani (2014) using the

Indriani, R., Suranta, E., Carina, L. and Wirataadmaja, A.

The Effect of Gains/Losses from Changes in Fair Value of Financial Instruments on the Value Relevance and Risk for Investor.

DOI: 10.5220/0009588700002900

In Proceedings of the 20th Malaysia Indonesia International Conference on Economics, Management and Accounting (MIICEMA 2019), pages 97-104

ISBN: 978-989-758-582-1; ISSN: 2655-9064

principle of one to one to illustrate that the use of fair value accounting is more

appropriate for banks. The argument is that the gains/losses resulting from fair value

contain useful information if reported objectively.

Research relating the advantages/disadvantages of changes in fair value is mostly

concerning changes in fair value of liabilities. As Yong et al. (2012) found a positive

relationship between gains (losses) changes in the fair value of liabilities with stock

returns and stock risk. This opinion is also strengthened by Nurasiah and Nuryani's

(2014) research which states that the gains and losses of changes in the fair value of

liabilities have a value relevance to stock returns and have a positive relationship with

stock risk. The results of two studies show that the profit (loss) changes in the fair value

of a liability relate to the profit (loss) of the company's equity holders. However,

research by Barth et al., (2008) states that changes in credit risk negatively affect equity

returns. The results indicate that the recognition of profit/loss changes in fair value of

liabilities has a negative effect on the company's equity holders.

Meanwhile, Petroni and Wahlen (1995) found that the relevance and reliability of

fair value estimates are only for actively traded equity and treasury investments,

compared to bond securities and other debt instruments. But not consistent with Barth

(1994), Petroni and Wahlen (1995) found a positive relationship between stock returns

and changes in fair value for insurance companies. This research shows that changes in

the fair value of investments are relevant values in the insurance industry's liabilities.

Research Lim et.al. (2011) using the return model and international banking data found

that the relevance of profit/loss and fair value is crucially dependent on the economic

characteristics and accounting choices of the bank.

From this description, this study will measure the relevance of value using stock

returns whereas, the risk implications are measured using beta stocks. This study refers

to research conducted by Yong et al. (2012) which examines the implications of FAS

159 fair value liability gains and losses for relevant values and relevant risks of financial

companies. However, in this research, besides looking at the gains / losses due to

changes in the fair value of liabilities, it will also see the advantages / disadvantages of

changes in fair value in terms of financial assets, such as the research conducted by Lim

et al (2011). Also, in this study using data in the financial sector that has applied PSAK

No. 55 (2014 Revision), which recognizes gains (losses) in its financial instruments and

is listed on the Indonesia Stock Exchange (IDX).

2 Literature Review

Accounting information is said to be relevant if the information can affect investors in

changing decisions. Increased information competition in the capital market causes the

importance of knowing important information in financial statements (Nursiah and

Nuryani, 2014). Likewise, the adoption of PSAK 55 requires companies to measure

their financial instruments using fair value. Where, it will have an impact on companies

recognizing the existence of gains / losses due to changes in the fair value of their

financial instruments in the income statement. Then, information about the gains /

losses of fair value will be information that will be given a response by the market

through the stock price.

MIICEMA 2019 - Malaysia Indonesia International Conference on Economics Management and Accounting

In accordance with previous research conducted by Yong et al. (2012) which states

that there is a positive relationship between gains and losses in changes in the fair value

of liabilities with stock returns after being controlled with earnings before gains and

losses. Which means that reporting the gains and losses on changes in the fair value of

this liability has a relevant value for investors in making decisions.

In line with Yong et al. (2012), Nursiah and Nuryani (2014) also found a significant

positive relationship between gains/losses in changes in the fair value of financial

instruments with stock returns which also indicate that the information has relevant

value. Research conducted by Lim et al. (2011) more generally, looking at the side of

financial instruments also found that there are relevant values of fair value gains/losses

which are also influenced by economic characteristics and accounting choices. So the

one hypothesis in this study is

H1: Gain/Loss of changes in the fair value of financial instruments having

relevant values.

Furthermore, relevant information if the information has a confirmatory and

predictive value so that investors will see the materiality in the information that will

make it possible to change investor decisions that pose a risk for investors themselves.

Information about fair value becomes relevant for high risk banks because fair value

provides two types of information, namely: 1) information about the company's ability

to make profits from arbitration activities and information about risk, 2) speculative

trading activities tend to be an important part of bank business operations that more

risky (Demirguc-Kunt and Huizinga, 2009).

Financial companies that are more at risk can generate capital gains from arbitration

activities which then gains (losses) at fair value can affect the success of the company

in the activity. As revealed by Kieso et al., (2011: 893) that companies that choose

financial instruments that are measured through the income statement have a profit

motive that will be obtained from price changes. This can lead to volatility of the

company's profits as a result of the recognition of gains / losses in changes in the fair

value of financial instruments. So investing in companies that apply fair value as a

measurement of their financial instruments is considered to have high market risk. This

research will use beta as a systematic measurement of risk. Where, the higher a security,

the more sensitive the security is to market changes. And the greater the market risk of

a company the more uncertain future returns so the lower the company's value in the

eyes of investors (Kurnia and Sufiyanti, 2015).

Like the research conducted by Yong et al. (2012) who found that there was a

positive relationship between revenue volumity resulting from the reporting of FAS

159 gains and losses on market risk, which indicated that measurements using fair value

had risks that were relevant to investors in estimating the economic volume of the

company. In line with research conducted by Hodder et al. (2006) which also states that

the income volumes of full-fair-value have a positive effect on the market-beta model

which means that information of fair value has risks that are relevant to investors.

Nursiah and Nuryani (2014) also said that net profit after profit / loss changes in the

value of liabilities carry relevant risks. So the second hypothesis of this study is

H2: Gain/loss of changes in the fair value of financial instruments having relevant

risks

The Effect of Gains/Losses from Changes in Fair Value of Financial Instruments on the Value Relevance and Risk for Investor

3 Research Methodology

This research is included in a positive paradigm that uses a quantitative approach and

is an empirical research (empirical research), intending to test the proposed hypothesis.

The observation unit (population) in this study is financial companies listed on the

Indonesia Stock Exchange in the period 2011-2015. The data collection method in this

study was done by purposive sampling as presented in Table 1 related to the research

sample.

Table 1. Number of Research Samples based on Criteria.

Criteria Samples Number of Companies %

Financial companies listed on the Indonesia Stock Exchange

(IDX) until 2012-2015

65 100

Companies that do not report financial statements in a row (11) (16,92)

Financial statements are presented in dollars (0) (0)

The number of companies that meet the research criteria and

serve as research samples

54 83,03

Quarterly observations (4 x 4) 16

Number of Samples hypothesis 1 864

Observation based on yea

Number of Samples hypothesis 2 216

Source: Secondary data processed.

The multiple regression equation model that will be examined in hypothesis testing

is as follows:

1) To test hypothesis one (H

) about the relevance of the value of profit / loss

changes in fair value used multiple linear regression analysis with the formula:

𝑅𝐸𝑇  𝛼



 𝛼



𝑁𝐼





 α



FinancInstru





 𝛼



𝐸𝑃𝑆  𝜀



2) To test hypothesis two (H

) about the relevance of the value of profit / loss

changes in fair value used multiple linear regression analysis with the formula:

𝐵𝐸𝑇𝐴



 𝛽



 𝛽



𝜎𝑁𝐼



 𝛽



𝜎𝑁𝐼





 𝛼



Explanation

𝛼



dan 𝛽



Constanta

𝛼



,𝛼



,𝛼



𝑑𝑎𝑛

𝛽



,𝛽



Coefficient Regression

𝜀



dan 𝛼



Error

RET Stock returns five days before trading and five days

after the publication of the company's financial

statements in year t, consistent with the research of

Barth et al. (2008), Yong et al. (2012), and Nursiah

dan Nur

ani (2014)

𝑁𝐼





Net profit for the year after deducting profit/loss

from changes in fair value unrealized by the

compan

ear t, scaled b

total assets in

ear

FinancInstru





Gains / losses from changes in fair value of financial

instruments scaled b

total assets in

ear

MIICEMA 2019 - Malaysia Indonesia International Conference on Economics Management and Accounting

100

𝐸𝑃𝑆

Earnings per share of company year t

𝐵𝐸𝑇𝐴



Standard Deviation of company returns in year t by

using the adjusted market beta model, consistent

with the research of Yong et al (2012), Lim et al

(2011), Hodder et al (2006), and Nursiah and

ani (2014),

𝜎𝑁𝐼





Standard deviation of net income for year t

𝜎𝑁𝐼







Standard deviation of net income minus gains/losses

on changes in fair value of financial instruments that

have not been realized in

ear t.

Hypothesis testing will be used multiple regression analysis using software for each

hypothesis. Then the t-test value will be seen to determine whether a hypothesis is

accepted or rejected.

4 Result and Discussion

Table 2 presents descriptive data statistics in this study, which consists of minimum,

maximum, average, and standard deviation of variables in the research equation.

Table 2. Descriptive Statistics.

Variable Code n Min Max Mean StDev

Equation 1

864 -1,89394 0,062575 -0,001784 0,020885

IFinancInstru 864 -0.302765 0.162089 0.017168 0,032737

FinancInstru 864 -0.142116 0.073462 0.0000070 0,016438

EPS 864 -126,8 1707 102,2276 177,9248

Equation 2

Beta 216 0,014906 0,399664 0,087496 0,062152

Stdevni 216 0,000172 0,105331 0,012784 0,014885

StdevniFinancInstru 216 0,000114 0,105331 0,12991 0,015199

Source: Secondary data processed.

Hypothesis 1 test results using the fixed effect model model are shown in Table 4.

Equation 1 obtained an F value of 2.978477 with a significance of 0.000000 indicating

that this equation model is fit and can be used to test hypotheses. Equation 2 which uses

multiple regression equations, has a statistical value of F in this equation model is

3.818976 with a significance level of 0.024377, a significance value of F below 0.05

indicates that the model in this study is fit so that it can be used to test hypotheses.

The Effect of Gains/Losses from Changes in Fair Value of Financial Instruments on the Value Relevance and Risk for Investor

101

Table 3. Hypothesis Testing Results.

Variable

Direction

Prediction

Coef. Sig Conclusion

Equation 1

Constanta -0,000021 0,8688

NiFinancInstru 0,008024 0,0351

FinancInstru (+) 0,026670 0,0440

Accepted

EPS 0,000002 0,0080

R Square 0,174448

Adj R Square 0,115879

F 2,978477

Sig 0,000000

Equation 2

Constanta 0,056533 0,0000

σNI (+) -1,016796 0,0130 Rejected

σNiFinancinstru (+) 0,850722 0,0310

R-Squared 0,053926

Adj. R-Squared 0,039805

F 3,818976

Sig 0,024377

Source: Secondary data processed.

The results of testing the first hypothesis have a coefficient value of α2 of 0.026670

with a significance level of 0.0440 where, the value is smaller than 0.05. So it was

concluded that the information gains/losses on changes in the fair value of financial

instruments have a significant positive effect on stock returns. This empirically proves

that information on profit/loss changes in fair value of financial instruments is relevant

information so that it can influence investors' investment decisions. So the first

hypothesis which states that the gains/losses of changes in the fair value of financial

instruments have a value relevance to investors is otherwise accepted. The test results

of net profit after profit/loss changes in the fair value of financial instruments have an

effect on return with a positive coefficient direction, namely 0.008024 with a

significance of 0.0351 (below 0.05). This shows that net profit after profit/loss changes

in fair value of financial instruments have a significant positive effect on company stock

returns. The results of testing earnings per share (EPS) proved to have a significant

positive effect on stock returns seen from the coefficient value of 0.000002 with a

significance of less than 0.05 ie, 0.0080.

Coefficient value β1 which shows the relationship between net income in which

there is information of profit / loss changes in the fair value of financial instruments is

-1.016796 with a significance value of 0.0130 (p-value <0.05). These results indicate

that there is a significant negative relationship between net income and information on

gains/losses in changes in fair value of the stock beta. This indicates that the

gains/losses on changes in the fair value of financial instruments are able to assess the

MIICEMA 2019 - Malaysia Indonesia International Conference on Economics Management and Accounting

102

volatility of a company's earnings which allows investors to assess the risk so that it

will reduce the risk. So it can be concluded that hypothesis 2 in this study was rejected.

However, in contrast to net income after deducting the gains/losses in changes in the

fair value of financial instruments have a coefficient value of 0.850722 with a

significance of 0.0310 (less than 0.05). These results indicate that net income without

profit/loss information changes in the fair value of financial instruments has a

significant positive effect on beta. This result shows that net income without

information on profit/loss changes in fair value of financial instruments has relevant

risks for investors.

Discussion of the Effect of Gains/Losses From Changes In Fair Value of Financial

Instruments on The Value Relevance and Risk For Investor. Based on hypothesis

testing profit/loss information due to changes in the fair value of financial instruments

to stock returns is indicated as relevant information for investors, and can reduce the

volatility of company profits so that investors can use them in assessing the company's

economic risk. nformation on profit / loss due to changes in fair value of financial

instruments can be used by investors in making investment decisions. This is in

accordance with the objectives of the standard setters where, it is expected that the

recognition of gains/losses in changes in the fair value of financial instruments can

lower earnings volatility (Nursiah and Nuryani, 2014). So that information is more

reliable by investors in predicting the company's financial performance and is useful in

making investment decisions.

The test results regarding the risk of informing profit/loss due to changes in the fair

value of financial instruments, are not in line with the research of Hodder et al (2006)

and Yong et al (2012). Based on the average of the standard deviation values of earnings

where, with information on gains / losses in changes in fair value therein, it appears that

the average of the standard deviations is small which indicates that information on

gains/losses on changes in fair value of financial instruments has very little risk. This

is confirmed by the average of the standard deviation of earnings after being reduced

by the gain/loss of changes in fair value having a higher average. Indicates that profits

without information on gains/losses on changes in fair value are more risky than profits

wherein there is information on gains/losses on changes in fair value. This result

indicates that information on profit/loss changes in fair value of financial instruments

does not provide risk for investors in investing because investors are able to assess the

risk.

5 Conclusion

Basically the purpose of this study is to empirically examine the effect of gains / losses

on changes in the fair value of financial instruments on the value relevance and the

relevance of risk for investors. Based on the results obtained from data processing and

analysis using multiple regression analysis with the help of Eviews 9 software, the

following conclusions can be drawn:

1) Gains/losses in changes in the fair value of financial instruments have a

significant positive effect on stock returns. That is, information on profit/loss

changes in the fair value of financial instruments that are relevant to investors.

The Effect of Gains/Losses from Changes in Fair Value of Financial Instruments on the Value Relevance and Risk for Investor

103

2) Gains/losses on changes in fair value of financial instruments have a significant

negative effect on stock beta. That is, information on profit/loss changes in the

fair value of financial instruments is able to reduce risk for investors.

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