We investigate the reliability of mandatory annual fair value estimates for UK investment property. We find that appraisal estimates understate actual selling prices and are considerably less biased and more accurate measures of selling price than respective historical costs. Investigations of managerial discretion over fair value reporting reveal that managers select among permissible accounting methods to report higher earnings, time asset sales to smooth reported earnings changes, smooth reported net asset changes and boost fair values prior to raising new debt. Finally, we find that the reliability of appraisal estimates increases when monitored by external appraisers and Big 6 auditors.

The risk classification of commercial bank loans is performed by loan officers, bank controllers, auditors, and bank examiners. Despite the importance of this classification decision, little empirical research has been performed to explain this subjective evaluation procedure. In this paper, a simple linear model is developed which reproduces most of the lending officer's classification decisions. Two variables, a debt-to-total-assets ratio and a funds-flow-to-fixed-commitments ratio, provided most of the explanatory power, but a sales trend variable was also significant. For some of the loans for which the model and the actual classification differed, the model's classification was found to be an advance indicator of a subsequent reclassification by the lending officer. The simple three-variable linear model provided much better predictions of loan risk classification than did two popular bankruptcy prediction models.

The AICPA Special Committee on Financial Reporting has urged disclosure of relevant forward‐looking information on risks and opportunities to supplement conventional financial statements. We conduct a laboratory market experiment to assess the effects of such disclosures on capital allocation decisions. We develop two sets of competing hypotheses regarding how capital markets react to supplemental disclosures. One set is based on the assumption of semi‐strong market efficiency, while the other posits that the bounded rationality of individual traders leads to inefficient market prices. We find that explicit disclosure of management’s best estimate of an uncertain quantity improves market efficiency, even though this disclosure is redundant with information in financial statements. Second, we find disclosure of an upper bound of management’s estimate has the potential to bias security prices upward, while informationally equivalent disclosure of both upper and lower bounds removes this bias. These results suggest that experimental market reactions to these supplemental disclosures are inconsistent with market efficiency. Supplemental analyses of individuals’ price predictions and trading behavior support our conclusion that inefficiencies are at least partially attributable to individual information processing biases.