Model-Based Fair Values for Financial Instruments : Relevance or Reliability? Evidence from a Conjoint Analysis

The FASB and the IASB have defined the provision of decision useful information as the primary objective of financial reporting. Decision usefulness is based on two fundamental qualitative characteristics, relevance and reliability (now replaced by “faithful representation”). Using a conjoint analysis, we examine the extent to which relevance and reliability contribute to decision usefulness. 202 MSc and MBA students enrolled in financial and managerial accounting courses ranked, by decision usefulness, five different techniques for determining a risk premium in the context of estimating a corporate bond's model-based fair value. The techniques have different combinations of relevance and reliability in a trade-off situation. Results show that relevance contributes to decision usefulness more than reliability, independent of an individuals' degree of uncertainty avoidance or their familiarity with fair values. Additional experimentation with financial analysts and auditors confirms our results. The findings have important implications for academics, preparers and, especially, for standard setters