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.
Finance, Business and Banking
Review of Accounting Studies
WEYNS, Guy Joseph Mathilde; Bachar, J,; and Melumad, N..
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/1244