Title

On cost tradeoffs between conservative and market value accounting

Publication Type

Journal Article

Publication Date

1997

Abstract

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.

Keywords

Finance, Business and Banking

Discipline

Accounting

Publication

Review of Accounting Studies

Volume

2

Issue

1

First Page

7-34

ISSN

1380-6653

Identifier

10.1023/A:1018314526438

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