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The Economic Consequences of Fair Value Accounting

  • Yuan Mingzhe

    (Shandong University)

  • Liu Huifeng

    (Shandong University)

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    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.

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    Article provided by De Gruyter in its journal Accounting, Economics, and Law.

    Volume (Year): 1 (2011)
    Issue (Month): 2 (April)
    Pages: 1-44

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    Handle: RePEc:bpj:aelcon:v:1:y:2011:i:2:n:1
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    1. Ijiri, Yuji, 2005. "US accounting standards and their environment: A dualistic study of their 75-years of transition," Journal of Accounting and Public Policy, Elsevier, vol. 24(4), pages 255-279.
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    7. Robert Boyer, 2007. "Assessing the impact of fair value upon financial crises," Post-Print hal-00812978, HAL.
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