Assessing the impact of fair value upon financial crises

Robert Boyer
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Robert Boyer: PJSE - Paris-Jourdan Sciences Economiques - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique, PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École nationale des ponts et chaussées - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, CEPREMAP - Centre pour la recherche économique et ses applications - ECO ENS-PSL - Département d'économie de l'ENS-PSL - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres

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Abstract: This article challenges the notion that the reform of accounting principles in accordance with fair value would provide better information, and that more transparency would reinforce the resilience of the economy. Actually, fair value gives at each instant a seemingly relevant liquidation value, but obscures the value creation process by mixing present profit with unrealized capital gains and losses. This discrepancy increases with an increased degree of uncertainty, which is at odds with widely held beliefs about the efficiency of existing financial markets. Fair value introduces an accounting accelerator on top of the already present and typical financial accelerator. It extends to the entire economic system, the source of financial fragility typical of the 1990s. If fair value accounting is applied to banks, an extra volatility may be created unless a new wave of innovations introduces countervailing forces.

Keywords: Economic systems; Financial markets; Accounting principles; Financial fragility; Financial crisis; Complementarity of accounting and economic regime (search for similar items in EconPapers)
Date: 2007-10
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Citations: View citations in EconPapers (34)

Published in Socio-Economic Review, 2007, 5 (4), pp.779-807. ⟨10.1093/ser/mwm018⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00812978

DOI: 10.1093/ser/mwm018

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