Journal Article

Assessing the impact of fair value upon financial crises

Robert Boyer

in Socio-Economic Review

Published on behalf of Society for the Advancement of Socio-Economics

Volume 5, issue 4, pages 779-807
Published in print October 2007 | ISSN: 1475-1461
Published online October 2007 | e-ISSN: 1475-147X | DOI: http://dx.doi.org/10.1093/ser/mwm018
Assessing the impact of fair value upon financial crises

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  • Moral Philosophy
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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; G14 information and market efficiency; event studies; G32 financing policy; capital and ownership structure; G34 mergers; acquisitions; restructuring; corporate governance

Journal Article.  9902 words.  Illustrated.

Subjects: Moral Philosophy ; Corporate Social Responsibility ; Welfare Economics ; Political Economy ; Economic Sociology

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