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Marking to Market and Inefficient Investment Decisions

Clemens A. Otto () and Paolo Volpin

No 986, HEC Research Papers Series from HEC Paris

Abstract: We examine how mark-to-market accounting affects investment decisions in an agency model with reputation concerns. Reporting the current market value of a firm's assets in the financial statements can serve as a disciplining device because the information contained in the market price provides a benchmark against which the agent's actions can be evaluated. However, the fact that market prices are informative can have a perverse effect on the investment decisions: The agent may prefer to ignore relevant but contradictory private information whose revelation would damage his reputation. Surprisingly, this effect makes mark-to-market accounting less desirable as market prices become more informative.

Keywords: Accounting rules; marking to market; historical cost accounting; investment decisions; reputation; agency problem (search for similar items in EconPapers)
JEL-codes: D81 G31 M41 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2013-06-29
New Economics Papers: this item is included in nep-acc, nep-bec, nep-cta and nep-mic
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