When Myopic Managers Must Mark to Market

Adam Kolasinski () and Nan Yang ()
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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

Management Science, 2024, vol. 70, issue 9, 6234-6254

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.

Keywords: financial crises; banking; bank liquidity provision; CEO incentives; CEO pay duration; capital regulation; real earnings management; other-than-temporary impairments; fair value accounting (search for similar items in EconPapers)
Date: 2024
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