Are Fair Value Adjustments Driven By Bonus-Based Compensation? : Evidence from Nordic Real Estate Firms

Sammanfattning

This study examines whether executive bonus-based compensation is associated with recurring fair value adjustments of investment properties in Nordic listed real estate firms operating under IAS 40. In this setting, investment properties are measured at fair value and revalued on a recurring basis, with changes recognized directly in the income statement. Given the reliance on Level 3 inputs and managerial judgment, fair value measurement introduces discretion, which may create opportunities for incentive-driven reporting behavior. However, strong institutional environments, governance mechanisms, and external monitoring may constrain accounting discretion and limit opportunistic behavior. Building on Positive Accounting Theory and the bonus plan hypothesis, this study investigates whether such incentives are reflected in valuation-based accounting outcomes. Using a quantitative research approach, the study analyzes a panel dataset consisting of 300 firm-year observations from 60 Nordic listed real estate firms over the period 2020-2024. Executive bonus-based compensation is measured as bonus intensity relative to total compensation, while fair value adjustments are captured through three dimensions: the probability of upward adjustments, recurring upward adjustments, and material adjustments. Logistic regression models are applied to test the proposed hypotheses, controlling for firm-specific characteristics and time effects. The empirical findings do not provide support for a statistically significant relationship between executive bonus-based compensation and upward or recurring fair value adjustments. However, the results find support for the relationship between executive bonus-based compensation and non-material fair value adjustments. The findings indicate that fair value adjustments are more likely shaped by valuation practices, external monitoring, institutional environment, and firm-specific characteristics. The study contributes to the literature by extending the examination of managerial incentives to a fair value context under IFRS 13, particularly focusing on recurring adjustments of non-financial assets. The findings highlight the importance of institutional and reporting contexts and suggest that incentive effects predicted by traditional theories may be limited in environments characterized by strong governance and external oversight.