Accounting’s fair-value shift substitutes financial models for actual market prices

Evidence

One central point is the promotion of ”fair value” as a central principle of valuation5 (Mu¨ller 2013). This principle marks a break from previous accounting standardisation because it makes market prices more important in the construction of balance sheets, as more assets are now regularly readjusted to market price. In the past, it was considered more prudent to keep them at historical cost (often the past market price). This change can be considered as a sign of an increasing belief in the market’s power of veridiction. But yet such practices were widespread in the 19th century, before any standards were issued for company accounts. The really new development is the possibility of using financial models (calculation of NPV for forecast flows, or more sophisticated models derived from financial engineering) to value certain balance sheet items whenever there are no available market prices. Financial models are thus seen as being able to estimate a quasi-market price. — Ève Chiapello, Financialisation of Valuation, 48

Categorization

• XREF: Connects directly to the reader’s financialization focus: the point that mark-to-market isn’t new but model-based quasi-market pricing is, reframing what ‘financialized valuation’ actually innovated. Also ties to MacKenzie’s work on the performativity of financial models. — connects to: Finance derives prices for new objects from unrelated market prices — Ève Chiapello, Financialisation of Valuation, 39; Probabilistic valuation methods migrated from actuarial science into financial markets via Gaussian risk models — Ève Chiapello, Financialisation of Valuation, 33; Some financial metrics resist financialization by ignoring time and capital logic — Ève Chiapello, Financialisation of Valuation, 44
• DEFINE: Clarifies the three-level fair-value hierarchy and the subtle distinction between historical-cost and model-based valuation.
• SEED: An essay angle: ‘The really new thing isn’t markets valuing everything — it’s models posing as markets,’ about how simulated market prices gain authority over both actual prices and historical cost.

Related

• Finance derives prices for new objects from unrelated market prices (similarity 0.86)
• Some financial metrics resist financialization by ignoring time and capital logic (similarity 0.83)
• Financialised valuation draws on financial economics and mathematical finance. (similarity 0.82)
• Probabilistic valuation methods migrated from actuarial science into financial markets via Gaussian risk models (similarity 0.81)
• Financial models construct the markets they purport only to describe. (similarity 0.80)

Broader Connections

• Probabilistic valuation methods migrated from actuarial science into financial markets via Gaussian risk models #expands (0.75) — Ève Chiapello, Financialisation of Valuation, 33
• Some financial metrics resist financialization by ignoring time and capital logic #qualifies (0.72) — Ève Chiapello, Financialisation of Valuation, 44