Marking to Market and Inefficient Investment Decisions

67 Pages Posted: 15 Feb 2013 Last revised: 15 Jun 2016

See all articles by Clemens A. Otto

Clemens A. Otto

Singapore Management University - Lee Kong Chian School of Business

Paolo F. Volpin

City University London - Faculty of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: June 14, 2016

Abstract

We examine how mark-to-market accounting affects the investment decisions of managers with reputation concerns. Reporting the current market value of a firm's assets can help mitigate agency problems because it provides outsiders (e.g., shareholders) with new information against which the management's decisions can be evaluated. However, the fact that the assets' market value is informative can also have a negative side effect: Managers may shy away from investments that indicate conflicting private information and would damage their reputation. This effect can lead to inefficient investment decisions and make marking to market less desirable when market prices are more informative.

Keywords: Marking to Market, Investment Decisions, Reputation, Agency Problem

JEL Classification: D81, G31, M41

Suggested Citation

Otto, Clemens A. and Volpin, Paolo F., Marking to Market and Inefficient Investment Decisions (June 14, 2016). HEC Paris Research Paper No. FIN-2013-986. Available at SSRN: https://ssrn.com/abstract=2218349 or http://dx.doi.org/10.2139/ssrn.2218349

Clemens A. Otto (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

Paolo F. Volpin

City University London - Faculty of Finance ( email )

London, EC2Y 8HB
Great Britain

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http:/www.ecgi.org

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