When Myopic Managers Must Mark Down to Market

Abstract

While prior research suggests strict, fair-value-based securities accounting rules cause banks to sell securities into negative shocks, a value-destroying behavior called liquidity feedback trading, the mechanism is uncertain. We find the sooner CEOs are permitted to sell their stock, the more prone are their banks to feedback trading. Furthermore, the sooner CEOs can sell, the more positive their banks' stock price reaction to news of accounting rule relaxation. We conclude incentives for excessive managerial short-term focus are a mechanism by which stricter accounting rules cause feedback trading. We find no evidence regulatory compliance concerns play a role.