The Economic Trade-Offs in the Fair Value Debate
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
Date posted: October 2, 2009 ; Last revised: March 27, 2010
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