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Marking to Market and Inefficient Investment Decisions

Author

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  • Otto, Clemens A.
  • Volpin , Paolo F.

Abstract

We examine how mark-to-market accounting affects investment decisions in an agency model with reputation concerns. Reporting the current market value of a firm's assets in the financial statements can serve as a disciplining device because the information contained in the market price provides a benchmark against which the agent's actions can be evaluated. However, the fact that market prices are informative can have a perverse effect on the investment decisions: The agent may prefer to ignore relevant but contradictory private information whose revelation would damage his reputation. Surprisingly, this effect makes mark-to-market accounting less desirable as market prices become more informative.

Suggested Citation

  • Otto, Clemens A. & Volpin , Paolo F., 2013. "Marking to Market and Inefficient Investment Decisions," HEC Research Papers Series 986, HEC Paris.
    • Handle: RePEc:ebg:heccah:0986
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    Keywords

    Accounting rules; marking to market; historical cost accounting; investment decisions; reputation; agency problem;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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