Rev Quant Finan Acc https://doi.org/10.1007/s11156-018-0742-5 ORI G INAL RESEARCH The inﬂuence of uncertainty on the standard-setting decision between fair value and historical cost accounting under asymmetric information Christian Blecher Springer Science+Business Media, LLC, part of Springer Nature 2018 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. Keywords Standard-setting Signaling Earnings
Review of Quantitative Finance and Accounting – Springer Journals
Published: May 31, 2018
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