Jurnal Umum
Marking-to-Market: Panacea or Pandora’s Box?
Financial institutions have been at the forefront of the debate on the controversial
shift in international standards from historical cost accounting to
mark-to-market accounting. We show that the trade-offs at stake in this debate
are far from one-sided. While the historical cost regime leads to some
inefficiencies, marking-to-market may lead to other types of inefficiencies by
injecting artificial risk that degrades the information value of prices, and induces
suboptimal real decisions.We construct a framework that can weigh the
pros and cons.We find that the damage done by marking-to-market is greatest
when claims are (1) long–lived, (2) illiquid, and (3) senior. These are precisely
the attributes of the key balance sheet items of banks and insurance companies.
Our results therefore shed light on why banks and insurance companies
have been the most vocal opponents of the shift to marking-to-market.
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