Accounting Standards and Financial Market Stability: An Experimental Examination | Zendy

Lin Shengle | Zendy; Pfeiffer Glenn | Zendy; Porter David | Zendy

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Accounting Standards and Financial Market Stability: An Experimental Examination

Author(s) -

Lin Shengle,

Pfeiffer Glenn,

Porter David

Publication year - 2017

Publication title -

the economic journal

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 4.683

H-Index - 160

eISSN - 1468-0297

pISSN - 0013-0133

DOI - 10.1111/ecoj.12335

Subject(s) - leverage (statistics) , default , business , fair value , asset (computer security) , monetary economics , accounting , economics , financial economics , finance , computer security , machine learning , computer science

We examine the effects of three alternative accounting methods in an experimental asset market characterised by bubbles and crashes: fair value (M2M), historical cost ( HC ) and marked to fundamental value (M2F). Each treatment is replicated under both no‐leverage and leverage conditions. In the no‐leverage condition, we find that accounting methods do not have a significant effect on asset mispricing. In the leverage condition, both M2M and M2F accounting methods exacerbate asset mispricing. Yet, the two differ in leverage dynamics. M2F markets are completely immune to defaults, while M2M markets experience the most frequent and the most severe defaults.

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