The role of market valuation in financial crises

The present chapter focuses on the role of market valuation during financial crises. Consistent with the dominant efficient markets paradigm in finance, market prices are the best estimate of a firm fundamental value and they readjust as long as new, unpredictable, information is revealed. However, recent empirical literature in finance emphasizes that market prices can be influenced by the accounting rules in force and by the level of transparency/opacity of the firms’ activities. In particular, we discuss how these problems are more acute in the case of bank equity valuation as the opacity of banks assets badly affects the efficient transmission of information into stock prices. We underline how the findings of this literature have important policy and regulatory implications.