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Market Transparency and the Accounting Regime

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  • ALEXANDER BLECK
  • XUEWEN LIU
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    Abstract

    ABSTRACT We model the interaction of financial market transparency and different accounting regimes. This paper provides a theoretical rationale for the recently proposed shift in accounting standards from historic cost accounting to marking to market. The paper shows that marking to market can provide investors with an early warning mechanism while historical cost gives management a "veil" under which they can potentially mask a firm's true economic performance. The model provides new explanations for several empirical findings and has some novel implications. We show that greater opacity in financial markets leads to more frequent and more severe crashes in asset prices (under a historic-cost-accounting regime). Moreover, our model indicates that historic cost accounting can make the financial market more rather than less volatile, which runs counter to conventional wisdom. The mechanism shown in the model also sheds light on the cause of many financial scandals in recent years. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2007.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Accounting Research.

    Volume (Year): 45 (2007)
    Issue (Month): 2 (05)
    Pages: 229-256

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    Handle: RePEc:bla:joares:v:45:y:2007:i:2:p:229-256

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    Cited by:
    1. Josep Ma. Argiles (UB) & Josep Garcia Bladon (IQS) & Teresa Monllau (UPF), 2009. "Fair value versus historic cost Valuation for Biological assets: Implications for the quality of financial information," Working Papers in Economics 215, Universitat de Barcelona. Espai de Recerca en Economia.
    2. Kim, Jeong-Bon & Li, Yinghua & Zhang, Liandong, 2011. "Corporate tax avoidance and stock price crash risk: Firm-level analysis," Journal of Financial Economics, Elsevier, vol. 100(3), pages 639-662, June.
    3. Julien Clavier, 2011. "Transition aux normes comptables IAS/IFRS, discipline de marché et adéquation des fonds propres aux risques dans l'industrie bancaire européenne," Post-Print hal-00646838, HAL.
    4. Kim, Jeong-Bon & Li, Yinghua & Zhang, Liandong, 2011. "CFOs versus CEOs: Equity incentives and crashes," Journal of Financial Economics, Elsevier, vol. 101(3), pages 713-730, September.

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