Did Fair-Value Accounting Contribute to the Financial Crisis?
The recent financial crisis has led to a major debate about fair-value accounting. Many critics have argued that fair-value accounting, often also called mark-to-market accounting, has significantly contributed to the financial crisis or, at least, exacerbated its severity. In this paper, we assess these arguments and examine the role of fair-value accounting in the financial crisis using descriptive data and empirical evidence. Based on our analysis, it is unlikely that fair-value accounting added to the severity of the current financial crisis in a major way. While there may have been downward spirals or asset-fire sales in certain markets, we find little evidence that these effects are the result of fair-value accounting. We also find little support for claims that fair-value accounting leads to excessive write-downs of banks' assets. If anything, empirical evidence to date points in the opposite direction, that is, towards overvaluation of bank assets.
We appreciate helpful comments from David Autor, Chad Jones, Martin Hellwig, Hal Scott, Hyun Shin, Andrei Shleifer, Doug Skinner, Timothy Taylor, workshop participants at the University of Chicago as well as helpful conversations with Jacob Goldfield, Peter Goldschmidt (PwC), Timothy Schott (KPMG), and Timo Willershausen (PwC). We thank Denis Echtchenko, Frank Li and, in particular, Ashish Shenoy for their excellent research assistance. Christian Laux gratefully acknowledges the hospitality at the University of Chicago Booth School of Business, which he visited while the paper was written, and research funding provided by the Center for Financial Studies (CFS) at the Goethe-University Frankfurt. Christian Leuz gratefully acknowledges the support by the Neubauer Family Faculty Fellowship and the Initiative on Global Markets (IGM) at the University of Chicago Booth School of Business. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
Christian Laux & Christian Leuz, 2010. "Did Fair-Value Accounting Contribute to the Financial Crisis?," Journal of Economic Perspectives, American Economic Association, vol. 24(1), pages 93-118, Winter. citation courtesy of