Mark-to-market accounting can limit the ability to make long-term investments and promote pro-cyclical behavior on the part of long-term investors, such as insurance companies, according to new research.
The World Economic Forum, New York, published this finding in a summary of results from a report that recommends policymakers consider the unintended consequences of regulatory decisions affecting accounting and capital requirements on investors’ ability to make long-term investments. The report cites mark-to-market accounting as an example.
The report says that “mark-to-market accounting may encourage investors to focus on near-term changes in market value, rather than the long-term prospects of an investment. Stricter capital requirements may require investors to hold less risky assets and thus not take advantage of long-term risk premia.”
As a result, the report notes,”the rules intended to promote transparency and appropriate risk management have a potential inadvertent cost. Long-term investors will generate lower returns due to higher risk aversion than necessitated by their liability structures. And there will be a reduction in the availability of long-term capital.”