Did Fair-Value Accounting Contribute to the Financial Crisis?

Christian Laux and Christian Leuz

No 15515, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The recent financial crisis has led to a major debate about fair-value accounting. Many critics have argued that fair-value accounting, often also called mark-to-market accounting, has significantly contributed to the financial crisis or, at least, exacerbated its severity. In this paper, we assess these arguments and examine the role of fair-value accounting in the financial crisis using descriptive data and empirical evidence. Based on our analysis, it is unlikely that fair-value accounting added to the severity of the current financial crisis in a major way. While there may have been downward spirals or asset-fire sales in certain markets, we find little evidence that these effects are the result of fair-value accounting. We also find little support for claims that fair-value accounting leads to excessive write-downs of banks' assets. If anything, empirical evidence to date points in the opposite direction, that is, towards overvaluation of bank assets.

JEL-codes: F3 G15 G21 G24 G38 K22 M41 M48 (search for similar items in EconPapers)
Date: 2009-11
New Economics Papers: this item is included in nep-acc, nep-ban, nep-bec, nep-cba and nep-reg
Note: CF
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Citations: View citations in EconPapers (32)

Published as 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.

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Journal Article: Did Fair-Value Accounting Contribute to the Financial Crisis? (2010)
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