THE LIMITATIONS OF MARKET VALUE ACCOUNTING AND A MORE REALISTIC ALTERNATIVE

Market value accounting (MVA) might improve market and regulatory discipline on financial institutions. Unfortunately, there are serious conceptual, measurement, and incentive problems with implementing MVA that have not received significant attention. These problems are suggested by the theory of asymmetric information and the role intermediaries play in solving information and monitoring problems. After analyzing the problems with MVA, we develop an alternative approach that applies MVA principles where they are most feasible and uses a statistical procedure where asymmetric information problems make MVA particularly problematic. An empirical analysis suggests that this procedure may substantially improve the distribution of regulatory discipline. © 1991.