Historic cost accounting versus fair value accounting
Research Project
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01.01.2013
- 31.12.2014
In this project we consider firms that prepare accounting reports about the value of their assets. Two opposing rules are considered, (a) fair value accounting where the firm reports the (exected) price at which an asset could be sold to an outside investor and (b) historic cost accouting where the firm reports the asset's acquisition or construction cost. Following conventional wisdom, rule (b) is less prone to manipulation but also less informative than (a). In a first sub-project we show that this is not generally true. Rather, we show that under some circumstances incentives for manipulation under Rule (b) are greater than under rule (a). In a second sub-project we consider application of both rules in banks. Following the common claim that the recent financial crisis had been triggered by fair-value accounting, we investigate the likelihood of bank runs. We show that the claim is sometimes, but not always, true. In a third sub-project we follow the claim that giving companies the right to choose between rules (a) and (b) improves capital market efficiency, because discretion between both rules makes a signalling equilibrium possible. We explore the limits of that argument.
