ABSTRACT
The fair value debate generates electricity in the usually static-free professions of accountancy and regulation. In theory, market prices ought to be a full and fair reflection of the present value of future cash flows on an asset. If market prices exhibit greater volatility than warranted by fundamentals, this will be mirrored in the balance sheet footings and profits of entities marking their positions to market. Among market participants, the use of fair values and fleet-of-foot risk management techniques is widely felt to have contributed to the relative success of some firms during the course of the crisis. One special case of shareholder protection arises when management increase their risk-taking incentives as the probability of failure rises. Such incentives are inbuilt in a world of limited liability. But the ability to engage in such gambling for redemption depends importantly on the degree of information asymmetry between the shareholders and the manager.
