Is Historical Cost Accounting a Panacea? Market Stress, Incentive Distortions, and Gains Trading

Andrew Ellul, Chotibhak Jotikasthira, Christian T. Lundblad and Yihui Wang

Journal of Finance, 2015, vol. 70, issue 6, 2489-2538

Abstract: Accounting rules, through their interactions with capital regulations, affect financial institutions’ trading behavior. The insurance industry provides a laboratory to explore these interactions: life insurers have greater flexibility than property and casualty insurers to hold speculative‐grade assets at historical cost, and the degree to which life insurers recognize market values differs across U.S. states. During the financial crisis, insurers facing a lesser degree of market value recognition are less likely to sell downgraded asset‐backed securities. To improve their capital positions, these insurers disproportionately resort to gains trading, selectively selling otherwise unrelated bonds with high unrealized gains, transmitting shocks across markets.

Date: 2015
References: Add references at CitEc
Citations: View citations in EconPapers (83)

Downloads: (external link)
https://doi.org/10.1111/jofi.12357

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:70:y:2015:i:6:p:2489-2538

Ordering information: This journal article can be ordered from
http://www.afajof.org/membership/join.asp

Access Statistics for this article

More articles in Journal of Finance from American Finance Association Contact information at EDIRC.
Bibliographic data for series maintained by Wiley Content Delivery ().