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On Cost Tradeoffs Between Conservative and Market Value Accounting

Author

Listed:
  • Joseph Bachar

    (Arthur Andersen)

  • Nahum D. Melumad

    (Arthur Andersen)

  • Guy Weyns

    (Arthur Andersen)

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.

Suggested Citation

  • Joseph Bachar & Nahum D. Melumad & Guy Weyns, 1997. "On Cost Tradeoffs Between Conservative and Market Value Accounting," Review of Accounting Studies, Springer, vol. 2(1), pages 7-34, March.
    • Handle: RePEc:spr:reaccs:v:2:y:1997:i:1:d:10.1023_a:1018314526438
    DOI: 10.1023/A:1018314526438
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    References listed on IDEAS

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