Abstract

http://ssrn.com/abstract=1575374
 
 

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Did Fair-Value Accounting Contribute to the Financial Crisis?


Christian Laux


Vienna University of Economics and Business Administration

Christian Leuz


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI); Center for Financial Studies (CFS); University of Pennsylvania - Wharton Financial Institutions Center; CESifo Research Network

February 20, 2010

Journal of Economic Perspectives, Vol. 24, pp. 93-118, Winter 2010

Abstract:     
The recent financial crisis has led to a major debate about fair-value accounting. Many critics have argued that fair-value accounting, often also called mark-to-market accounting, has significantly contributed to the financial crisis or, at least, exacerbated its severity. In this paper, we assess these arguments and examine the role of fair-value accounting in the financial crisis using descriptive data and empirical evidence. Based on our analysis, it is unlikely that fair-value accounting added to the severity of the 2008 financial crisis in a major way. While there may have been downward spirals or asset-fire sales in certain markets, we find little evidence that these effects are the result of fair-value accounting. We also find little support for claims that fair-value accounting leads to excessive write-downs of banks’ assets. If anything, empirical evidence to date points in the opposite direction, that is, towards overvaluation of bank assets.

Keywords: Mark-to-market accounting, Financial institutions, Liquidity, Financial crisis, Banks, Financial regulation, Procyclicality, Contagion

JEL Classification: G14, G15, G30, K22, M41, M42

Accepted Paper Series


Not Available For Download

Date posted: March 22, 2010  

Suggested Citation

Laux, Christian and Leuz, Christian, Did Fair-Value Accounting Contribute to the Financial Crisis? (February 20, 2010). Journal of Economic Perspectives, Vol. 24, pp. 93-118, Winter 2010. Available at SSRN: http://ssrn.com/abstract=1575374

Contact Information

Christian Laux
Vienna University of Economics and Business Administration ( email )
Welthandelsplatz 1
Vienna, Wien 1020
Austria
Christian Leuz (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-1996 (Phone)
HOME PAGE: http://chicagobooth.edu/fac/christian.leuz
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
HOME PAGE: http://www.nber.org
European Corporate Governance Institute (ECGI)
Brussels
Belgium
HOME PAGE: http://www.ecgi.org
Center for Financial Studies (CFS) ( email )
Grüneburgplatz 1
Frankfurt am Main, 60323
Germany
University of Pennsylvania - Wharton Financial Institutions Center
3641 Locust Walk
Philadelphia, PA 19104-6218
United States
CESifo Research Network
Poschinger Str. 5
Munich, DE-81679
Germany
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