Representation Faithfulness of Investment Property in Real Estate Companies

Abstract: The purpose of this Master Thesis is to investigate the representation faithfulness of reported investment property in Swedish real estate companies. Faithful representation is evaluated through comparing valuation estimates and realized selling prices on Swedish data from 2005-2008. Realized changes are found to be significantly higher than the estimated fair values of sold properties, on average higher than 10%. However, any conclusion regarding the degree of faithful representation is subject to the representativeness of the valuation estimate of the sold properties. Transaction intensity as a proxy for market information is found to be unable to explain the size of realized gains. Finally, indications of earnings management are found in the timing of asset sales and recognition of unrealized changes in value.