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Fair Value in Finance: Fifty Shades of Fairness

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  • Volkova, O.

    (National Research University Higher School of Economics, Saint-Petersburg, Russia)

Abstract

We discuss the content of the concept of fair value, practices and consequences of its application in accounting and finance, its interplay with other social and economic concepts. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is an alternative to the valuation of assets and liabilities at historic cost, which has been used in accounting and finance for several centuries and has ceased to fully satisfy markets in the last third of the twentieth century. The paper discusses the nature of fair value, the reasons and peculiarities of the implementation of this concept into the financial practices. It is shown that the main reasons for this are the financialization and the advance of transparency in economics and society. The role of fair value in the economic crisis of 2007-2009 is illustrated by two mechanisms: the blowing-up the book values of assets and the companies' plays in high volatility financial markets. The focus of discussion is on the effects of fair value: procyclicality in the financial markets, the perils for sustainable development, professional alterations (ethical and practical). The relationship between fair value and the concepts of honesty and fairness is analyzed. It is argued that despite all its shortcomings, FV fully meets the principles of fairness in regard to financial markets.

Suggested Citation

  • Volkova, O., 2018. "Fair Value in Finance: Fifty Shades of Fairness," Journal of the New Economic Association, New Economic Association, vol. 39(3), pages 85-109.
    • Handle: RePEc:nea:journl:y:2018:i:39:p:85-109
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    References listed on IDEAS

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    More about this item

    Keywords

    fair value; financial markets; financial reporting; transparency; financial crisis of 2007-2009; prociclicality; fairness; professional ethics;
    All these keywords.

    JEL classification:

    • A13 - General Economics and Teaching - - General Economics - - - Relation of Economics to Social Values
    • A19 - General Economics and Teaching - - General Economics - - - Other
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • G01 - Financial Economics - - General - - - Financial Crises
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • M14 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Corporate Culture; Diversity; Social Responsibility
    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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