Did Fair-Value Accounting Contribute to the Financial Crisis?

43 Pages Posted: 17 Nov 2009 Last revised: 25 May 2023

See all articles by Christian Laux

Christian Laux

Vienna University of Economics and Business; Vienna Graduate School of Finance (VGSF); European Corporate Governance Institute (ECGI)

Christian Leuz

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); Leibniz Institute SAFE; CESifo Research Network; Center for Financial Studies (CFS)

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Date Written: November 2009

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 current 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.

Suggested Citation

Laux, Christian and Leuz, Christian, Did Fair-Value Accounting Contribute to the Financial Crisis? (November 2009). NBER Working Paper No. w15515, Available at SSRN: https://ssrn.com/abstract=1505839

Christian Laux

Vienna University of Economics and Business ( email )

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Vienna Graduate School of Finance (VGSF) ( email )

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Christian Leuz (Contact Author)

University of Chicago - Booth School of Business ( email )

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CESifo Research Network

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