IDEAS home Printed from https://ideas.repec.org/a/wsi/rpbfmp/v13y2010i03ns0219091510002037.html
   My bibliography  Save this article

Is There a Future for Fair Value Accounting After the 2008–2009 Financial Crisis?

Author

Listed:
  • Bikki Jaggi

    (Rutgers Business School, Piscataway-NJ 08854, USA)

  • James P. Winder

    (Rutgers Business School, Piscataway-NJ 08854, USA)

  • Cheng-Few Lee

    (Rutgers Business School, Piscataway-NJ 08854, USA)

Abstract

This paper evaluates the role of fair value accounting in recent financial crisis, and examines whether the call for its demise is justified. Critics argue that fair accounting regulation added to the volatility in financial markets and aggravated financial crisis. On the other hand, supporters of this regulation argue that fair value accounting has been the victim of the recent financial crisis. They believe that this regulation is important for providing transparent, reliable, and accurate information on asset values to investors.After evaluating the impact of fair value accounting regulation on financial crisis, we examine negative and positive aspects of this regulation. Our discussion shows that fair value accounting provides useful information during stable market conditions, but its usefulness may become questionable during unstable and volatile financial markets. Overall, this regulation has the support of financial professional bodies. Some professionals are, however, concerned about recent modification to the fair value accounting rule, i.e., FAS 157-4, because this modification may not enhance reliability and accuracy of financial information. Despite recent modification, discussion on fair value accounting is far from over. Critics of the regulation still believe that this regulation should be eliminated, but the positive aspects of this regulation support its continuation.

Suggested Citation

  • Bikki Jaggi & James P. Winder & Cheng-Few Lee, 2010. "Is There a Future for Fair Value Accounting After the 2008–2009 Financial Crisis?," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 13(03), pages 469-493.
    • Handle: RePEc:wsi:rpbfmp:v:13:y:2010:i:03:n:s0219091510002037
    DOI: 10.1142/S0219091510002037
    as

    Download full text from publisher

    File URL: http://www.worldscientific.com/doi/abs/10.1142/S0219091510002037
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1142/S0219091510002037?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Nadauld, Taylor D. & Sherlund, Shane M., 2009. "The Role of the Securitization Process in the Expansion of Subprime Credit," Working Paper Series 2009-9, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    2. Guillaume Plantin & Haresh Sapra & Hyun Song Shin, 2004. "Fair Value Reporting Standards and Market Volatility," Post-Print hal-03462309, HAL.
    3. Yuliya Demyanyk & Otto Van Hemert, 2011. "Understanding the Subprime Mortgage Crisis," The Review of Financial Studies, Society for Financial Studies, vol. 24(6), pages 1848-1880.
    4. Francis A. Longstaff & Brett Myers, 2009. "Valuing Toxic Assets: An Analysis of CDO Equity," NBER Working Papers 14871, National Bureau of Economic Research, Inc.
    5. Mitchell, Janet & Fender, Ingo, 2009. "Incentives and Tranche Retention in Securitisation: A Screening Model," CEPR Discussion Papers 7483, C.E.P.R. Discussion Papers.
    6. repec:hal:spmain:info:hdl:2441/70ur20flu79u1at4a0q027ojpr is not listed on IDEAS
    7. Laux, Christian & Leuz, Christian, 2009. "The crisis of fair-value accounting: Making sense of the recent debate," Accounting, Organizations and Society, Elsevier, vol. 34(6-7), pages 826-834, August.
    8. Daniel M. Covitz & J. Nellie Liang & Gustavo A. Suarez, 2009. "The evolution of a financial crisis: panic in the asset-backed commercial paper market," Finance and Economics Discussion Series 2009-36, Board of Governors of the Federal Reserve System (U.S.).
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Gaëtan Le Quang, 2017. ""Taking Diversity into Account": the Diversity of Financial Institutions and Accounting Regulation," EconomiX Working Papers 2017-10, University of Paris Nanterre, EconomiX.
    2. Julien Azzaz & Stéphane Loisel & Pierre-E. Thérond, 2015. "Some characteristics of an equity security next-year impairment," Review of Quantitative Finance and Accounting, Springer, vol. 45(1), pages 111-135, July.
    3. Hong, Philip K. & Hwang, Seokyoun, 2018. "Fair value disclosure of pension plan assets and audit fees," Advances in accounting, Elsevier, vol. 41(C), pages 88-96.
    4. Gaëtan Le Quang, 2017. "Taking Diversity into Account: the Diversity of Financial Institutions and Accounting Regulation," Working Papers hal-04141663, HAL.
    5. Kun Yu, 2016. "Excess of the PBO over the ABO and hard pension freezes," Review of Quantitative Finance and Accounting, Springer, vol. 46(4), pages 819-846, May.
    6. Palea, Vera, 2013. "The Politics of Fair Value Reporting and the Governance of the Standards-Setting Process: Critical Issues and Pitfalls from a European Perspective," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201353, University of Turin.
    7. Olaf Korn & Clemens Paschke & Marliese Uhrig-Homburg, 2012. "Robust stock option plans," Review of Quantitative Finance and Accounting, Springer, vol. 39(1), pages 77-103, July.
    8. Guanming He & Helen Mengbing Ren & Richard Taffler, 2021. "Do corporate insiders trade on future stock price crash risk?," Review of Quantitative Finance and Accounting, Springer, vol. 56(4), pages 1561-1591, May.
    9. Palea, Vera & Biancone, Paolo Pietro, 2017. "Which Accounting Rules for Economic and Social Sustainable Development? Engaging Critically with IFRS Adoption in the EU," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201733, University of Turin.
    10. Hua-Wei Huang & Mai Dao & Wen-Chi Sun, 2017. "The Timeliness of Financial Reporting and Fair Values: Evidence from U.S. Banks," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 20(01), pages 1-30, March.
    11. Palea, Vera, 2019. "Accounting for Sustainable Finance: Does Fair value Accounting Fit for Long-term Investing in Equity?," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201912, University of Turin.
    12. James Cataldo, 2015. "A framework for assessing comprehensive income risk exposure over varying time horizons," Review of Quantitative Finance and Accounting, Springer, vol. 45(4), pages 819-844, November.
    13. Bikki Jaggi & Alessandra Allini & Francesca Manes Rossi & Adele Caldarelli, 2016. "Impact of Accounting Traditions, Ownership and Governance Structures on Financial Reporting by Italian Firms," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(01), pages 1-29, March.
    14. Palea, Vera, 2015. "The political economy of fair value reporting and the governance of the standards-setting process: Critical issues and pitfalls from a continental European union perspective," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 29(C), pages 1-15.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Leonard Nakamura, 2014. "Durable Financial Regulation: Monitoring Financial Instruments as a Counterpart to Regulating Financial Institutions," NBER Chapters, in: Measuring Wealth and Financial Intermediation and Their Links to the Real Economy, pages 67-88, National Bureau of Economic Research, Inc.
    2. Mardi Dungey & Gerald Dwyer & Thomas Flavin, 2013. "Systematic and Liquidity Risk in Subprime-Mortgage Backed Securities," Open Economies Review, Springer, vol. 24(1), pages 5-32, February.
    3. Pagès, Henri, 2013. "Bank monitoring incentives and optimal ABS," Journal of Financial Intermediation, Elsevier, vol. 22(1), pages 30-54.
    4. Fligstein, Neil & Goldstein, Adam, 2011. "Catalyst of Disaster: Subprime Mortgage Securitization and the Roots of the Great Recession," Institute for Research on Labor and Employment, Working Paper Series qt83x2h03n, Institute of Industrial Relations, UC Berkeley.
    5. Ashcraft, A. & Goldsmith-Pinkham, P. & Vickery, J., 2010. "MBS Ratings and the Mortgage Credit Boom," Discussion Paper 2010-89S, Tilburg University, Center for Economic Research.
    6. Nofsinger, John R., 2012. "Household behavior and boom/bust cycles," Journal of Financial Stability, Elsevier, vol. 8(3), pages 161-173.
    7. Ashcraft, A. & Goldsmith-Pinkham, P. & Vickery, J., 2010. "MBS Ratings and the Mortgage Credit Boom," Other publications TiSEM aea4b6fb-eb57-49d4-a347-f, Tilburg University, School of Economics and Management.
    8. Alper Kara & David Marques-Ibanez & Steven Ongena, 2015. "Securitization and Credit Quality," Working Papers 15013, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    9. Kuncl, Martin, 2019. "Securitization under asymmetric information over the business cycle," European Economic Review, Elsevier, vol. 111(C), pages 237-256.
    10. Huizinga, H.P. & Laeven, L., 2009. "Accounting Discretion of Banks During a Financial Crisis," Other publications TiSEM b94d0405-1ced-4aa4-870b-2, Tilburg University, School of Economics and Management.
    11. William Lang & Julapa Jagtiani, 2010. "The Mortgage and Financial Crises: The Role of Credit Risk Management and Corporate Governance," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 38(2), pages 123-144, June.
    12. Kau, James B. & Keenan, Donald C. & Lyubimov, Constantine & Carlos Slawson, V., 2011. "Subprime mortgage default," Journal of Urban Economics, Elsevier, vol. 70(2-3), pages 75-87, September.
    13. Huizinga, H.P. & Laeven, L., 2009. "Accounting Discretion of Banks During a Financial Crisis," Discussion Paper 2009-58, Tilburg University, Center for Economic Research.
    14. Manuel Adelino & Antoinette Schoar & Felipe Severino, 2015. "Loan Originations and Defaults in the Mortgage Crisis: The Role of the Middle Class," NBER Working Papers 20848, National Bureau of Economic Research, Inc.
    15. Kiff, John & Kisser, Michael, 2014. "A shot at regulating securitization," Journal of Financial Stability, Elsevier, vol. 10(C), pages 32-49.
    16. Christian Laux & Christian Leuz, 2010. "Did Fair-Value Accounting Contribute to the Financial Crisis?," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 93-118, Winter.
    17. Daniel I. García, 2018. "Employment in the Great Recession : How Important Were Household Credit Supply Shocks?," Finance and Economics Discussion Series 2018-074, Board of Governors of the Federal Reserve System (U.S.).
    18. Kara, Alper & Marques-Ibanez, David & Ongena, Steven, 2016. "Securitization and lending standards: Evidence from the European wholesale loan market," Journal of Financial Stability, Elsevier, vol. 26(C), pages 107-127.
    19. Ashcraft, A. & Goldsmith-Pinkham, P. & Vickery, J., 2010. "MBS Ratings and the Mortgage Credit Boom," Other publications TiSEM 5da00f7a-44c3-4829-903c-d, Tilburg University, School of Economics and Management.
    20. Huizinga, H.P. & Laeven, L., 2009. "Accounting Discretion of Banks During a Financial Crisis," Other publications TiSEM 09764c84-fa16-45e7-942d-b, Tilburg University, School of Economics and Management.

    More about this item

    Keywords

    Financial crisis; fair value accounting; mark-to-market valuation; FAS 157-4; asset valuation; financial assets;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wsi:rpbfmp:v:13:y:2010:i:03:n:s0219091510002037. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Tai Tone Lim (email available below). General contact details of provider: http://www.worldscinet.com/rpbfmp/rpbfmp.shtml .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.