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.”

The Group of North American Insurance Enterprises (GNAIE) commends the findings of the report.

“We are working closely with global insurers and accounting standard setters to develop standards for insurance contracts and their underlying investments that provide understandable, transparent, comparable and reliable information about a company’s performance which avoid creating artificial volatility — such as short-term mark-to-market movements stemming from illiquid markets — that could further destabilize already dysfunctional markets and inhibit long-term investing where economically appropriate,” says Jerry de St. Paer, chairman of GNAIE.

–Warren S. Hersch