On Cost Tradeoffs Between Conservative and Market Value Accounting

Publication Type

Journal Article

Publication Date

3-1997

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

accounting, regimes, cost tradeoffs

Discipline

Accounting | Corporate Finance

Research Areas

Financial Performance Analysis

Publication

Review of Accounting Studies

Volume

2

Issue

1

First Page

7

Last Page

34

ISSN

1380-6653

Identifier

10.1023/A:1018314526438

Publisher

Springer

Embargo Period

3-6-2014

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