The Effect of Fair vs. Book Value Accounting on the Behavior of Banks
AbstractThis paper studies the effect of book versus fair value accounting on a bank's (re)investment behavior, risk of default, investment value, and the need for regulation. Adopting the wide--spread view that fair value accounting reduces the degree of asymmetric information, it shows that fair value accounting increases liquidity. Consequently, it intensifies risk shifting and, therefore, increases the need for regulation and the risk of default. For highly leveraged institutions the increased risk shifting under fair value accounting outweighs an underinvestment of book value accounting and ultimately reduces welfare.
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Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
- M41 - Business Administration and Business Economics; Marketing; Accounting - - Accounting - - - Accounting
This paper has been announced in the following NEP Reports:
- NEP-ACC-2004-07-11 (Accounting & Auditing)
- NEP-ALL-2004-07-11 (All new papers)
- NEP-FIN-2004-07-11 (Finance)
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