ABSTRACT (78 words) This paper presents evidence that accounting (or flow-of-fund) macroeconomic models helped anticipate the credit crisis and economic recession. Equilibrium models ubiquitous in mainstream policy and research did not. This study identifies core differences, traces their intellectual pedigrees, and includes case studies of both types of models. It so provides constructive recommendations on revising methods of financial stability assessment. Overall, the paper is a plea for research into the link between accounting concepts and practices and macro economic outcomes.

We investigate the extent to which hedge fund managers smooth self‐reported returns. In contrast with prior research on the “anomalous ” properties of hedge fund returns, we observe the mechanisms used to price the fund’s investment positions and report the fund’s performance to investors, thereby allowing us to differentiate between asset illiquidity and misreporting‐based explanations. We find that funds using less verifiable pricing sources and funds that provide managers with greater discretion in pricing investment positions are more likely to have returns consistent with intentional smoothing. Traditional controls, however, such as removing the manager from the setting and reporting of the fund’s net asset value and the use of reputable auditors and administrators are not associated with lower levels of smoothing. With respect to asset illiquidity vs. misreporting, investment style and portfolio characteristics explain 14.0–24.3 percent of the variation in our smoothing measures and pricing controls explain an additional 4.1–8.8 percent, suggesting that asset illiquidity is the major factor

At the peak of the financial crisis in October 2008, the IASB was put under strong political pressure and allowed financial companies to suspend fair value accounting for selected financial assets. Using a comprehensive global sample of publicly listed IFRS banks, we examine the economic consequences of this amendment to IAS 39. Our results suggest that the reclassification option produces both intended and unintended consequences. In the short-run, the amendment has served to provide relieve to most troubled banks avoiding fair value losses and ultimately regulatory costs from supervisory interventions. However, analyses of longterm effects on capital market show that the suspension of fair value measurement leads to a significant increase in information asymmetry, supporting claims that fair value measurement of financial assets provides useful information for capital markets.

We provide new empirical evidence concerning the contentious debate over the use of historical cost versus fair value accounting in regulating financial institutions. These accounting rules, through their interactions with capital regulation, alter financial institutions ’ optimal portfolio choice and trading behavior. The insurance industry provides a natural laboratory in which to explore these interactions. First, there exist significant differences in regulatory accounting rules; life insurers have greater flexibility to hold speculative-grade instruments at historical cost than property and casualty insurers. Second, within an insurer’s investment portfolio, detailed data are available on transactions, positions, and, most importantly, the regulatory accounting treatment for each security. When faced with severe downgrades among their holdings in asset-backed securities (ABS), life insurers largely continue to hold the downgraded securities at historical cost and instead selectively sell their corporate bond holdings with the highest unrealized gains, inducing significant price declines. This is particularly true for life insurers facing regulatory capital constraints and with high ABS exposures. This behavior is largely absent among property and casualty insurers; they instead disproportionately sell their re-marked ABS holdings. Historical cost accounting creates an altered incentive environment in which constrained financial

ABSTRACT One of the most contentious issues raised during the recent crisis has been the potentially exacerbating role played by mark-to-market accounting. Many have proposed the use of historical cost accounting, promoting its ability to avoid the amplification of systemic risk. We caution against focusing on the accounting rule in isolation, and instead emphasize the interaction between accounting and the regulatory framework. First, historical cost accounting, through incentives that arise via interactions with complex capital adequacy regulation, does generate market distortions of its own. Second, while mark-to-market accounting may indeed generate fire sales during a crisis, forward-looking institutions that rationally internalize the probability of fire sales are incentivized to adopt a more prudent investment strategy during normal times which leads to a safer portfolio entering the crisis. Using detailed, position-and transaction-level data from the U.S. insurance industry, we show that (a) market prices do serve as 'early warning signals', (b) insurers that employed historical cost accounting engaged in greater degrees of regulatory arbitrage before the crisis and limited loss recognition during the crisis, and (c) insurers facing mark-to-market accounting tend to be more prudent in their portfolio allocations. Our identification relies on the sharp difference in statutory accounting rules between life and P&C companies as well as the heterogeneity in implementation of these rules within each insurance type across U.S. states. Rather than promoting a shift away from market-based information, our results indicate that regulatory simplicity may be preferred to the complexity of risk-weighted capital ratios that gives rise, through interactions with accounting rules, to distorted risk-taking incentives and potential build-up of systemic risk.

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The globalization of accounting standards as seen through the proliferation of IFRS worldwide is one of the most important developments in corporate governance over the last decade. I offer an analysis of some international political dynamics of countries’ IFRS harmonization decisions. The analysis is based on field studies in three jurisdictions: Canada, China, and India. Across these jurisdictions, I first describe unique elements of domestic political economies that are shaping IFRS policies. Then, I inductively isolate two principal dimensions that can be used to characterize the jurisdictions ’ IFRS responses: proximity to existing political powers at the IASB; and own potential political power at the IASB. Based on how countries are classified along these dimensions, I offer predictions, ceteris paribus, on countries ’ IFRS harmonization strategies. The analysis and framework in this paper can help broaden the understanding of accounting’s globalization.

Fair value measurements of control premiums Abstract: As the overview of the current state of research within this paper shows, the debate around fair value measurements is far from over. This paper analyses fair value measurement requirements in a controversial scenario, namely when a control premium exists. The analyses of the paper show that, while measurement rules around control premiums could have a material impact on fair value measurements and the financial statements as a whole, significant fair value measurement issues remain unresolved. The conclusion is that fair value measurements should include or exclude control premiums consistently. It is argued that including control premiums for all fair value measurements is the most faithful representation of the underlying economic phenomenon. This paper contributes to the fair value measurement debate by comparing the merits of alternative fair value measurements for control premiums and highlights an area where researchers, investors and other users should exercise caution when evaluating financial statements.

I conducted this study on fair value accounting during my time as a PhD student at the Departamento de Ciências Economicas Empresariais at the Universidade Autónoma de Lisboa, Portugal. I am grateful for the help of numerous organizations and persons and wish to express thanks to everyone who supported me during the creation of this thesis. First, I want to thank my doctoral advisor Professor Associado Renato Pereira, PhD who successfully supported my interest in fair value accounting and the circumstances of the latest financial crisis. I thank him for taking an active interest in my pursuits, for being an interested, encouraging, and competent discussant as well as a generous supervisor. Special thanks go to Bureau van Dijk for providing me with empirical data on European banking institutions from their bankscope database and no less to the R Foundation for offering their software environment “R Project for Statistical Computing”. This thesis would not have come to a successful end without the support and encourage-ment of my dear colleagues and friends. They saw me through all phases, delighted, painful, astray and otherwise, of my dissertation project. They could not even be deterred from proof-

Professor of Economics