Fair value disclosure quality and earnings management across economic cycles: A content analysis through the lens of creative accounting in Swedish real estate firms

Abstract

This study investigates whether and how the quality of fair value disclosures under IAS 40 varies across different economic states in Swedish listed real estate firms. Although prior research has demonstrated a negative relationship between disclosure quality and earnings management, limited attention has been given to how economic cycles influence the transparency of IAS 40 disclosures in the real estate sector. Using a content analysis approach, the study evaluates 54 annual reports from nine Swedish real estate firms during the financial crisis period 2008-2010 and the boom period 2016-2018. The results suggest that disclosure quality was generally lower during the crisis period, particularly regarding sensitivity analysis, unobservable valuation inputs and explanations behind fair value changes. In contrast, more standardized disclosures, like choice of valuation method, remained stable in quality across both economic periods. A closer analysis of the firms with the lowest disclosure quality show some patterns consistent with potential earnings management behavior. However, the study also highlights the challenge of establishing definitive evidence of earnings management, as fair value accounting relies heavily on subjective assumptions and managerial judgement. At a minimum, the findings suggest that economic uncertainty may influence how transparently firms communicate fair value information, especially in disclosure areas characterized by greater accounting discretion.