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  4. August 2018
  5. Marking to Market versus Taking to Market

Marking to Market versus Taking to Market

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Abstract

Building on the idea that accounting matters for corporate governance, this paper studies the equilibrium interaction between the measurement rules that firms find privately optimal, firms' governance, and the liquidity in the secondary market for their assets. This equilibrium approach reveals an excessive use of market-value accounting: corporate performance measures rely excessively on the information generated by other firms' asset sales and insufficiently on the realization of a firm's own capital gains. This dries up market liquidity and reduces the informativeness of price signals, thereby making it more costly for firms to overcome their agency problems.

Citation

Plantin, Guillaume, and Jean Tirole. 2018. "Marking to Market versus Taking to Market." American Economic Review, 108 (8): 2246-76. DOI: 10.1257/aer.20161749

Additional Materials

JEL Classification

  • D21 Firm Behavior: Theory
  • D82 Asymmetric and Private Information; Mechanism Design
  • G34 Mergers; Acquisitions; Restructuring; Voting; Proxy Contests; Corporate Governance
  • G38 Corporate Finance and Governance: Government Policy and Regulation
  • M41 Accounting
  • M48 Accounting and Auditing: Government Policy and Regulation