On Cost Tradeoffs Between Conservative and Market-Value Accounting
Coauthor(s): Joseph Bachar, Guy Weyns.
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.
Source: Review of Accounting Studies
Bachar, Joseph, Nahum Melumad, and Guy Weyns. "On Cost Tradeoffs Between Conservative and Market-Value Accounting." Review of Accounting Studies 2, no. 1 (March 1997): 7-34.