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Marking to market versus taking to market

Plantin, Guillaume and Tirole, Jean (2015) Marking to market versus taking to market. SRC Discussion Paper (No 51). Systemic Risk Centre, The London School of Economics and Political Science, London, UK.

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Abstract

While the debate on cost and market-value accounting has been raging for years, economists lack a framework allowing a comparison of their relative merits. This paper considers an agency model in which the measurement of an asset can be based on public market data (marking to market) and/or on the realization of its value through costly resale to an informed buyer (taking to market). At the optimal contract, noisier market data lead to cost accounting and gains trading (selling winners/keeping losers) whereas accurate data naturally favor market-value accounting. The quality of market data and the magnitude of resale costs both depend on the volume of transactions, and therefore on accounting rules. The paper studies the mutual feedback between individually optimal accounting rules and asset market liquidity. This equilibrium approach reveals a socially excessive use of market-value accounting that dries up market liquidity and reduces the informativeness of price signals.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.systemicrisk.ac.uk/
Additional Information: © 2015 The Authors
Divisions: Systemic Risk Centre
Subjects: H Social Sciences > HF Commerce > HF5601 Accounting
JEL classification: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information
M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M41 - Accounting
M - Business Administration and Business Economics; Marketing; Accounting > M5 - Personnel Economics > M52 - Compensation and Compensation Methods and Their Effects (stock options, fringe benefits, incentives, family support programs, seniority issues)
Sets: Research centres and groups > Systemic Risk Centre
Date Deposited: 21 Jan 2016 15:25
Last Modified: 20 Feb 2019 03:55
Projects: ES/K002309/1, ES/K002309/1
Funders: ESRC, Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/65104

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