The influence of uncertainty on the standard-setting decision between fair value and historical cost accounting under asymmetric information

The influence of uncertainty on the standard-setting decision between fair value and historical... 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 http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

The influence of uncertainty on the standard-setting decision between fair value and historical cost accounting under asymmetric information

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Publisher
Springer US
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
D.O.I.
10.1007/s11156-018-0742-5
Publisher site
See Article on Publisher Site

Abstract

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

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: May 31, 2018

References

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