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Marking to Market: Panacea or Pandora's Box?

32 Pages Posted: 30 Jul 2008 Last revised: 11 Nov 2010

Guillaume Plantin

University of Toulouse 1 - Toulouse School of Economics (TSE)

Haresh Sapra

University of Chicago - Booth School of Business

Hyun Song Shin

Bank for International Settlements

Date Written: August 13, 2007

Abstract

Financial institutions have been at the forefront of the debate on the controversial shift in international standards from historical cost accounting to mark-to-market accounting. We show that the trade-offs at stake in this debate are far from one-sided. While the historical cost regime leads to some inefficiencies, marking to market may lead to other types of inefficiencies by injecting artificial risk that degrades the information value of prices, and induces sub-optimal real decisions. We construct a framework that can weigh the pros and cons. We find that the damage done by marking to market is greatest when claims are (i) long-lived, (ii) illiquid, and (iii) senior. These are precisely the attributes of the key balance sheet items of banks and insurance companies. Our results therefore shed light on why banks and insurance companies have been the most vocal opponents of the shift to marking to market.

JEL Classification: M41, M44, M47, G21, G22

Suggested Citation

Plantin, Guillaume and Sapra, Haresh and Shin, Hyun Song, Marking to Market: Panacea or Pandora's Box? (August 13, 2007). Journal of Accounting Research, Vol. 46, No. 2, pp. 435-460, 2008. Available at SSRN: https://ssrn.com/abstract=1186362

Guillaume Plantin

University of Toulouse 1 - Toulouse School of Economics (TSE) ( email )

Place Anatole-France
Toulouse Cedex, F-31042
France

Haresh Sapra (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Hyun Song Shin

Bank for International Settlements ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

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