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When Myopic Managers Must Mark to Market

Author

Listed:
  • Adam Kolasinski

    (Finance, Mays School of Business, Texas A&M University, College Station, Texas 77843)

  • Nan Yang

    (School of Accounting and Finance, The Hong Kong Polytechnic University, Hong Kong, China)

Abstract

Although prior research suggests strict, fair value–based securities accounting rules cause banks to sell securities into negative liquidity shocks, a value-destroying behavior called “liquidity feedback trading,” the mechanism is uncertain. We find the sooner chief executive officers (CEOs) are permitted to cash out of their stock and option grants, the more prone are their banks to feedback trading. Furthermore, the sooner CEOs can cash out, the more positive their banks’ stock price reaction to news of accounting rule relaxation. We conclude incentives for managerial short-term focus are a mechanism by which stricter accounting rules cause feedback trading. We also find evidence that regulatory compliance concerns play a role.

Suggested Citation

  • Adam Kolasinski & Nan Yang, 2024. "When Myopic Managers Must Mark to Market," Management Science, INFORMS, vol. 70(9), pages 6234-6254, September.
    • Handle: RePEc:inm:ormnsc:v:70:y:2024:i:9:p:6234-6254
    DOI: 10.1287/mnsc.2020.03249
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