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Did Fair-Value Accounting Contribute to the Financial Crisis?

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  • Christian Laux
  • Christian Leuz

Abstract

The recent financial crisis has led to a major debate about fair-value accounting. Many critics have argued that fair-value accounting, often also called mark-to-market accounting, has significantly contributed to the financial crisis or, at least, exacerbated its severity. In this paper, we assess these arguments and examine the role of fair-value accounting in the financial crisis using descriptive data and empirical evidence. Based on our analysis, it is unlikely that fair-value accounting added to the severity of the 2008 financial crisis in a major way. While there may have been downward spirals or asset-fire sales in certain markets, we find little evidence that these effects are the result of fair-value accounting. We also find little support for claims that fair-value accounting leads to excessive write-downs of banks' assets. If anything, empirical evidence to date points in the opposite direction, that is, toward the overvaluation of bank assets during the crisis.

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jep.24.1.93
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Bibliographic Info

Article provided by American Economic Association in its journal Journal of Economic Perspectives.

Volume (Year): 24 (2010)
Issue (Month): 1 (Winter)
Pages: 93-118

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Handle: RePEc:aea:jecper:v:24:y:2010:i:1:p:93-118

Note: DOI: 10.1257/jep.24.1.93
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  1. Luc Laeven & Giovanni Majnoni, 2002. "Loan loss provisioning and economic slowdowns: too much too late?," Conference Series ; [Proceedings], Federal Reserve Bank of Boston.
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  7. Douglas W. Diamond & Raghuram G. Rajan, 2009. "Fear of Fire Sales and the Credit Freeze," NBER Working Papers 14925, National Bureau of Economic Research, Inc.
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  9. Allen, Franklin & Carletti, Elena, 2008. "Mark-to-market accounting and liquidity pricing," Journal of Accounting and Economics, Elsevier, vol. 45(2-3), pages 358-378, August.
  10. Shleifer, Andrei & Vishny, Robert W, 1992. " Liquidation Values and Debt Capacity: A Market Equilibrium Approach," Journal of Finance, American Finance Association, vol. 47(4), pages 1343-66, September.
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