When Myopic Managers Must Mark to Market

Abstract

Although prior research suggests strict, fair value–based securities accounting rules cause banks to sell securities into negative liquidity shocks, a value-destroying behavior called “liquidity feedback trading,” the mechanism is uncertain. We find the sooner chief executive officers (CEOs) are permitted to cash out of their stock and option grants, the more prone are their banks to feedback trading. Furthermore, the sooner CEOs can cash out, the more positive their banks’ stock price reaction to news of accounting rule relaxation. We conclude incentives for managerial short-term focus are a mechanism by which stricter accounting rules cause feedback trading. We also find evidence that regulatory compliance concerns play a role. This paper was accepted by Tomasz Piskorski, finance. Funding: A. Kolasinski is grateful for financial support from Mays Business School at Texas A&M University. N. Yang thanks the School of Accounting and Finance at The Hong Kong Polytechnic University for financial support. Supplemental Material: The data and online appendix are available at https://doi.org/10.1287/mnsc.2020.03249 .