Unfair 'Fair Value' in Illiquid Markets: Excessive Spillover Effects in Times of Crisis

50 Pages Posted: 17 May 2019 Last revised: 9 Aug 2019

See all articles by Alex Dontoh

Alex Dontoh

New York University (NYU) - Department of Accounting

Fayez A. Elayan

Brock University-Goodman School of Business

Joshua Ronen

New York University (NYU) - Department of Accounting

Tavy Ronen

Rutgers Business School -Newark and New Brunswick, Department of Finance & Economics

Date Written: June 15, 2018

Abstract

The paper investigates the effects of mark-to-market write-downs by financial institutions on market prices and volumes, as well as the prominent role that illiquidity plays in exacerbating the direct and spillover effects of exit valuation on equity and credit default swaps markets. Using a hand-collected database of write-down announcements made during and after the credit crisis (from January 1, 2007 through June 30, 2010), we find that firms that write down assets in accordance with mark-to-market rules experience significant abnormal negative stock returns and spikes in the premiums of credit default swaps written on their obligations. Equally noteworthy, we find that similar firms without write-downs exhibited sympathetic and significant negative abnormal returns and positive premiums at the same time as the write-down firms. We find that the effects of information spillovers associated with write-downs during the financial crisis go beyond normal information transfer expected from asset fundamentals and may have contributed to adverse consequences of the crisis.

Keywords: Fair Values, Financial Crisis, Impairment, Spillover, Information Transfer

JEL Classification: G01, G21, G10, G14, M41

Suggested Citation

Dontoh, Alex and Elayan, Fayez A. and Ronen, Joshua and Ronen, Tavy, Unfair 'Fair Value' in Illiquid Markets: Excessive Spillover Effects in Times of Crisis (June 15, 2018). Available at SSRN: https://ssrn.com/abstract=3386459 or http://dx.doi.org/10.2139/ssrn.3386459

Alex Dontoh

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street, Suite 400
Suite 10-180
New York, NY 10012-1118
United States
212-998-0064 (Phone)
212-995-4004 (Fax)

Fayez A. Elayan

Brock University-Goodman School of Business ( email )

1812 Sir Issac Brock Way
St. Catharines, Ontario L2S 3A1
Canada
905-688-5550 (Phone)
905-688-9779 (Fax)

HOME PAGE: http://www.brocku.ca

Joshua Ronen (Contact Author)

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street, Suite 400
Suite 10-180
New York, NY 10012-1118
United States
212-998-4144 (Phone)
212-995-4599 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~jronen/

Tavy Ronen

Rutgers Business School -Newark and New Brunswick, Department of Finance & Economics ( email )

1 Washington Park
Newark, NJ 07102
United States
973-353-5272 (Phone)

HOME PAGE: http://https://www.business.rutgers.edu/faculty/tavy-ronen

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