On cost tradeoffs between conservative and market value accounting

• Main Authors: WEYNS, Guy Joseph Mathilde, Bachar, J, Melumad, N.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 1997
• Subjects: Finance; Business and Banking; Accounting
• Online Access: https://ink.library.smu.edu.sg/soa_research/1244
• Institution: Singapore Management University

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.