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The influence of uncertainty on the standard-setting decision between fair value and historical cost accounting under asymmetric information

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  • Christian Blecher

    (Kiel University)

Abstract

The design of accounting rules by the international standard-setters takes place by considering a trade-off between relevance and reliability. An example for this trade-off is the standard-setting decision between fair value accounting—associated with more relevant information—and historical cost accounting—associated with more reliable information. This paper examines in which way the decision of a standard-setter between fair value and historical cost accounting is influenced by the uncertainty of the underlying assets, if the standard-setter wants to minimize the social costs of his standard-setting decision. As a first step this paper uses a common signaling model: Good firms—i.e. firms with high expected cash flows in the future—signal their firm type to an analyst by using discretionary accruals to manage earnings. As a second step the resulting signaling costs are compared with the analyst’s costs for determining the firm type by using his own valuation technology. The standard-setter chooses the accounting rule that minimizes the social costs.

Suggested Citation

  • Christian Blecher, 2019. "The influence of uncertainty on the standard-setting decision between fair value and historical cost accounting under asymmetric information," Review of Quantitative Finance and Accounting, Springer, vol. 53(1), pages 47-72, July.
    • Handle: RePEc:kap:rqfnac:v:53:y:2019:i:1:d:10.1007_s11156-018-0742-5
    DOI: 10.1007/s11156-018-0742-5
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    Cited by:

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    More about this item

    Keywords

    Standard-setting; Signaling; Earnings management; Asymmetric information;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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