Fair Value and the Formation of Financial Market Prices Through Ignorance and Hazard

Abstract

Fair value refers to current values as the backbones of accounting measurements. Current value follows the efficient financial market (EFM) hypothesis - which abstracts away from economic realization - as guidance for the financial market investment process through ignorance and hazard. This chapter takes a systemic perspective on the formation of financial market prices over time and circumstances. Our financial system approach relaxes that EFM hypothesis by distinguishing and specifying both (i) the timely provision and treatment of firm-specific information, and (ii) the aggregating market price fixing that assures the ongoing matching between market orders which may depend on the latter information. From this systemic perspective, fair value regimes increase market volatility and market exuberance with inefficient allocative effects, although the correlation of accounting information with the market price series is improved.