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Accrual Accounting, Informational Sufficiency, and Equity Valuation

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  • ALEXANDER NEZLOBIN

Abstract

This paper studies accrual accounting and equity valuation in the context of a firm that makes repeated and overlapping investments in productive capacity. The analysis identifies a particular accrual accounting (depreciation) rule that is termed replacement cost accounting because the book value of existing capacity assets is set equal to the value that such assets would have if a competitive market were to exist for used assets. It is shown that replacement cost accounting aggregates past investment decisions of the firm without a loss of value‐relevant information. The intrinsic value of the firm can then be expressed as a function of current accounting data and certain parameters of the firm’s operating environment. Further, it is shown that replacement cost accounting is essentially the only accounting rule with this informational sufficiency property.

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  • Alexander Nezlobin, 2012. "Accrual Accounting, Informational Sufficiency, and Equity Valuation," Journal of Accounting Research, Wiley Blackwell, vol. 50(1), pages 233-273, March.
    • Handle: RePEc:bla:joares:v:50:y:2012:i:1:p:233-273
    DOI: 10.1111/j.1475-679X.2011.00428.x
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    1. Alexander Nezlobin & Madhav V. Rajan & Stefan Reichelstein, 2016. "Structural properties of the price-to-earnings and price-to-book ratios," Review of Accounting Studies, Springer, vol. 21(2), pages 438-472, June.
    2. Gunther Friedl & Stefan Reichelstein & Amadeus Bach & Maximilian Blaschke & Lukas Kemmer, 2023. "Applications of the levelized cost concept," Journal of Business Economics, Springer, vol. 93(6), pages 1125-1148, August.
    3. Dmitry Livdan & Alexander Nezlobin, 2017. "Accounting rules, equity valuation, and growth options," Review of Accounting Studies, Springer, vol. 22(3), pages 1122-1155, September.
    4. Christian Lohmann, 2015. "Managerial incentives for capacity investment decisions," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 26(1), pages 27-49, April.
    5. Stefan J. Reichelstein & Anshuman Sahoo, 2015. "Cost- and Price Dynamics of Solar PV Modules," CESifo Working Paper Series 5674, CESifo.
    6. Stefan Reichelstein & Anna Rohlfing-Bastian, 2014. "Levelized Product Cost: Concept and Decision Relevance," CESifo Working Paper Series 4590, CESifo.
    7. Livdan, Dmitry & Nezlobin, Alexander, 2022. "Incentivizing irreversible investment," LSE Research Online Documents on Economics 110531, London School of Economics and Political Science, LSE Library.
    8. Maureen McNichols & Madhav V. Rajan & Stefan Reichelstein, 2014. "Conservatism Correction for the Market-To-Book Ratio and Tobin's q," CESifo Working Paper Series 4626, CESifo.
    9. Livdan, Dmitry & Nezlobin, Alexander, 2021. "Investment, capital stock, and replacement cost of assets when economic depreciation is non-geometric," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1444-1469.

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