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Accounting Standards and Financial Market Stability: An Experimental Examination

Shengle Lin, Glenn Pfeiffer and David Porter

Economic Journal, 2017, vol. 127, issue 605, F545-F562

Abstract: We examine the effects of three alternative accounting methods in an experimental asset market characterised by bubbles and crashes: fair value (M2M), historical cost (HC) and marked to fundamental value (M2F). Each treatment is replicated under both no‐leverage and leverage conditions. In the no‐leverage condition, we find that accounting methods do not have a significant effect on asset mispricing. In the leverage condition, both M2M and M2F accounting methods exacerbate asset mispricing. Yet, the two differ in leverage dynamics. M2F markets are completely immune to defaults, while M2M markets experience the most frequent and the most severe defaults.

Date: 2017
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Journal Article: Accounting Standards and Financial Market Stability: An Experimental Examination (2017) Downloads
Working Paper: Accounting Standards and Financial Market Stability: An Experimental Examination (2014) Downloads
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Economic Journal is currently edited by Estelle Cantillon, Martin Cripps, Andrea Galeotti, Morten Ravn, Kjell G. Salvanes, Frederic Vermeulen, Hans-Joachim Voth and Rachel Kranton

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