Assessing the information content of mark-to-market accounting with mixed attributes: The case of cash flow hedges

Frank Gigler, Chandra S Kanodia, Raghu Venugopalan

Research output: Contribution to journalArticlepeer-review

21 Scopus citations

Abstract

We examine how outsiders rationally interpret a reported loss on derivatives when the application of mark-to-market accounting to cash flow hedges creates a mixed attribute problem. We find that because of the mixed attribute problem, the information content of mark-to-market accounting is related to the information content of historical cost accounting in a very specific way. This relationship allows us to identify the circumstances under which mark-to-market accounting facilitates and when it detracts from the objective of providing an early warning of potential financial distress. We show that the reporting of an impending derivative loss by a distressed firm can actually lead outsiders to infer that the firm is in a better financial position than what they would have inferred under the silence associated with historical cost accounting. Without the mixed attribute problem, mark-to-market accounting would always yield more accurate assessments of the firm's financial position.

Original languageEnglish (US)
Pages (from-to)257-276
Number of pages20
JournalJournal of Accounting Research
Volume45
Issue number2
DOIs
StatePublished - May 1 2007

Fingerprint Dive into the research topics of 'Assessing the information content of mark-to-market accounting with mixed attributes: The case of cash flow hedges'. Together they form a unique fingerprint.

Cite this