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/lp/springer_journal/the-influence-of-uncertainty-on-the-standard-setting-decision-between-JrFE2UpuiG
- Publisher
- Springer Journals
- Copyright
- Copyright © 2018 by Springer Science+Business Media, LLC, part of Springer Nature
- Subject
- Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
- ISSN
- 0924-865X
- eISSN
- 1573-7179
- DOI
- 10.1007/s11156-018-0742-5
- Publisher site
- See Article on Publisher Site
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.
Journal
Review of Quantitative Finance and Accounting – Springer Journals
Published: May 31, 2018
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