Market Transparency and the Accounting Regime

Journal of Accounting Research, Vol. 45, No. 2, pp. 229-256, May 2007

28 Pages Posted: 11 Dec 2007

See all articles by Alexander Bleck

Alexander Bleck

University of British Columbia - Sauder School of Business

Xuewen Liu

University of Hong Kong (HKU) - Finance Area, Faculty of Business and Economics

Abstract

We model the interaction of financial market transparency and different accounting regimes. This paper provides a theoretical rationale for the recently proposed shift in accounting standards from historic cost accounting to marking to market. The paper shows that marking to market can provide investors with an early warning mechanism while historical cost gives management a veil under which they can potentially mask a firm's true economic performance. The model provides new explanations for several empirical findings and has some novel implications. We show that greater opacity in financial markets leads to more frequent and more severe crashes in asset prices (under a historic-cost-accounting regime). Moreover, our model indicates that historic cost accounting can make the financial market more rather than less volatile, which runs counter to conventional wisdom. The mechanism shown in the model also sheds light on the cause of many financial scandals in recent years.

JEL Classification: M41, M43, G12

Suggested Citation

Bleck, Alexander and Liu, Xuewen, Market Transparency and the Accounting Regime. Journal of Accounting Research, Vol. 45, No. 2, pp. 229-256, May 2007, Available at SSRN: https://ssrn.com/abstract=1065864 or http://dx.doi.org/10.1111/j.1475-679X.2007.00231.x

Alexander Bleck (Contact Author)

University of British Columbia - Sauder School of Business ( email )

Canada
604-827-3452 (Phone)

Xuewen Liu

University of Hong Kong (HKU) - Finance Area, Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

HOME PAGE: http://web.hku.hk/~xuewenl/

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