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Marking to Market versus Taking to Market

Author

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  • Guillaume Plantin

    (ECON - Département d'économie (Sciences Po) - Sciences Po - Sciences Po - CNRS - Centre National de la Recherche Scientifique, Tepper School of Business - CMU - Carnegie Mellon University [Pittsburgh])

  • Jean Tirole

    (TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - INRA - Institut National de la Recherche Agronomique - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique)

Abstract

While the debate on cost and market-value accounting has been raging for years, economists lack a framework allowing a comparison of their relative merits. This paper considers an agency model in which the measurement of an asset can be based on public market data (marking to market) and/or on the realization of its value through costly resale to an informed buyer (taking to market). At the optimal contract, noisier market data lead to cost accounting and gains trading (selling winners/keeping losers) whereas accurate data naturally favor market-value accounting. The quality of market data and the magnitude of resale costs both depend on the volume of transactions, and therefore on accounting rules. The paper studies the mutual feedback between individually optimal accounting rules and asset market liquidity. This equilibrium approach reveals a socially excessive use of market-value accounting that dries up market liquidity and reduces the informativeness of price signals.

Suggested Citation

  • Guillaume Plantin & Jean Tirole, 2016. "Marking to Market versus Taking to Market," SciencePo Working papers Main hal-03393184, HAL.
    • Handle: RePEc:hal:spmain:hal-03393184
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03393184
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    References listed on IDEAS

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    4. Esraa Esam Alharasis & Hossam Haddad & Maha Shehadeh & Ahmad Saleem Tarawneh, 2022. "Abnormal Monitoring Costs Charged for Auditing Fair Value Model: Evidence from Jordanian Finance Industry," Sustainability, MDPI, vol. 14(6), pages 1-21, March.
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    More about this item

    Keywords

    Cost and market value accounting; Agency; Gains trading; Equilibrium accounting rules;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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