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The Economic Trade-Offs in the Fair Value Debate

Haresh Sapra

University of Chicago - Booth School of Business

March 19, 2010

Chicago Booth Research Paper No. 09-35

In this paper, I provide two general insights that are useful in evaluating the economic trade-offs of alternative accounting measurement rules. First, when there are multiple imperfections in the world, restricting a strict subset of it need not always improve welfare. Second, a firm is not a black box that operates independently of the measurement environment. Measuring a firm’s operations affects the firm’s actions which, in turn, affect the underlying distribution of cash flows that is being measured.

Using these two insights, I discuss the economic consequences of accounting measurement rules that strive for greater transparency. In particular, I focus on the costs and benefits of fair value accounting and its implications for financial stability.

Number of Pages in PDF File: 35

Keywords: Amplification Mechanism, Fair Value Accounting, Financial Stability, Historical Cost Accounting

JEL Classification: D52, G12, G21, G22, M41

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Date posted: October 2, 2009 ; Last revised: March 27, 2010

Suggested Citation

Sapra, Haresh, The Economic Trade-Offs in the Fair Value Debate (March 19, 2010). Chicago Booth Research Paper No. 09-35. Available at SSRN: http://ssrn.com/abstract=1481777 or http://dx.doi.org/10.2139/ssrn.1481777

Contact Information

Haresh Sapra (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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