We study how the information conveyed by fair value (FV) reporting is considered during an initial public offering (IPO). By examining how pre-IPO FV earnings are perceived by underwriters and investors, we document numerous original findings. First, IPOs with higher FV earnings have higher initial valuations and subsequent price revisions, indicating that underwriters and institutional investors value the information conveyed by FV reporting. Second, there is a significantly negative relation between FV earnings and post-IPO initial returns, whereas no such relation exists between non-FV earnings and initial returns. Third, we document robust positive associations between FV earnings and various measures of post-issue long-run stock performance. Fourth, we confirm the informational content of FV earnings by showing their predictive power for future earnings. We interpret these findings as supportive of the underreaction hypotheses, whereby aftermarket investors underreact to the information contained in FV reporting in the short run and gradually recognize the value of such information in the long run. We perform numerous tests to confirm the robustness of our results, including a test to address potential sample selection bias using the adoption of IFRS for small- and medium-sized entities (SMEs) as an exogenous determinant of FV reporting. Taken together, our findings advance our understanding of how fair value information is considered during an IPO issuance.

Recent Delaware Chancery Court decisions that boards are self-interested in setting director compensation have focused scrutiny on the pay-setting process used by corporations. We examine the effect of peer benchmarking on director compensation decisions. Director pay relates positively to peer director pay, and firms paying their directors highly are selected as peers. Moreover, firm performance and board advising performance are positively related to the talent component and are generally unrelated to the self-serving component of the peer pay effect. The evidence indicates that firms use peer benchmarking to justify high compensation mainly to attract talented directors to enhance board quality.