← Search

Journal of Finance Vol. 70 No. 6 2015

Is Historical Cost Accounting a Panacea? Market Stress, Incentive Distortions, and Gains Trading

Andrew Ellul; Chotibhak Jotikasthira; Christian Lundblad; Yihui Wang1,2,3,4,5,6,7

1 University of North Carolina at Chapel Hill · 2 Fordham University · 3 City University of Hong Kong · 4 Chinese University of Hong Kong · 5 University of Warwick · 6 American Finance Association · 7 Indiana University

Abstract

Accounting rules, through their interactions with capital regulations, affect financial institutions’ trading behavior. The insurance industry provides a laboratory to explore these interactions: life insurers have greater flexibility than property and casualty insurers to hold speculative‐grade assets at historical cost, and the degree to which life insurers recognize market values differs across U.S. states. During the financial crisis, insurers facing a lesser degree of market value recognition are less likely to sell downgraded asset‐backed securities. To improve their capital positions, these insurers disproportionately resort to gains trading, selectively selling otherwise unrelated bonds with high unrealized gains, transmitting shocks across markets.

DOI
10.1111/jofi.12357
Volume
70
Issue
6
Pages
2489-2538
Language
en
Sources
openalex bibtex:phds-export.bib crossref

Cite