Portfolio Choice with Accounting Concerns
Speaker
Abstract
| The present work analyzes in a dynamic setting the consequences of using different accounting regimes - Historic Cost (HC) vs. Fair Value (FV) - for the optimal choice of a financial portfolio, when the owner - a generic Financial Institution - is interested in consumption for two periods, c©û and c©ü, and two types of assets are available in the economy: one risky and one risk-free. Comparing with the theoretical optimal portfolio decisions (First Best), we find that both regimes lead to inefficiencies, but FV is ex-ante worse than HC in terms of consumption smoothing and the welfare loss is higher for the companies concerned with long-term business than for those with short-term horizons. Similarly, the ex-ante consumption level c©û for the non-terminal period is worse than the First Best value for both accounting regimes, with FV consumption less than the HC one. When the risky asset is illiquid and/or costs associated with transacting it are relevant to be taken into account, the ex-ante consumption smoothing superiority of the HC regime to the FV one is not always true but depends on the risky asset patterns (expected return and variance) and the transaction costs amount. |
| Contact information: |
| Paolo Perego |
