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The Economic Consequences of Fair Value Accounting

Author

Listed:
  • Yuan Mingzhe

    (Shandong University)

  • Liu Huifeng

    (Shandong University)

Abstract

Two fatal intrinsic flaws of fair-value accounting are found and mathematically proved by this paper. One flaw concerns its non-complete existence, that is, the required fair value may not exist under certain conditions. One direct consequence of the flaw is that a huge fair value trap may be created by fair-value accounting when the fair value does not exist. Another flaw of fair-value accounting is its self-expansion, that is, the fair-value accounting acts as a share price bubble maker based upon the normal net incomes from the operations of listed firms. The bubble may then expand much larger than the original incomes.

Suggested Citation

  • Yuan Mingzhe & Liu Huifeng, 2011. "The Economic Consequences of Fair Value Accounting," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 1(2), pages 1-44, April.
  • Handle: RePEc:bpj:aelcon:v:1:y:2011:i:2:n:1
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    References listed on IDEAS

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    9. Benston, George J., 2008. "The shortcomings of fair-value accounting described in SFAS 157," Journal of Accounting and Public Policy, Elsevier, pages 101-114.
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    Cited by:

    1. Schwarz Claudia & Karakitsos Polychronis & Merriman Niall & Studener Werner, 2015. "Why Accounting Matters: A Central Bank Perspective," Accounting, Economics, and Law: A Convivium, De Gruyter, pages 1-42.
    2. Schwarz Claudia & Karakitsos Polychronis & Merriman Niall & Studener Werner, 2015. "Why Accounting Matters: A Central Bank Perspective," Accounting, Economics, and Law: A Convivium, De Gruyter, pages 1-42.
    3. Yuri Biondi & Pierpaolo Giannoccolo, 2015. "Share price formation, market exuberance and financial stability under alternative accounting regimes," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 10(2), pages 333-362, October.

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