On Cost Tradeoffs Between Conservative and Market Value Accounting
We identify a cost tradeoff relevant to the comparison of alternative accounting regimes. We compare equilibrium deadweight losses, due to transacting and auditing, across the historical cost, lower-of-cost-or-market, and market value regimes. We provide conditions for each of the regimes to dominate the other two. We show that while market-value accounting is likely to prevail in an inflationary setting, it may also be optimal under deflation. Similarly, lower-of-cost-or-market is likely to prevail in a deflationary setting, though it may also be optimal under inflation. Last, historical cost prevails only if the variation in asset prices is sufficiently high.
accounting, regimes, cost tradeoffs
Accounting | Corporate Finance
Financial Performance Analysis
Review of Accounting Studies
Bachar, Joseph; Melumad, Nahum D.; and Weyns, Guy.
On Cost Tradeoffs Between Conservative and Market Value Accounting. (1997). Review of Accounting Studies. 2, (1), 7-34. Research Collection School Of Accountancy.
Available at: http://ink.library.smu.edu.sg/soa_research/1183