Accounting Depreciation and Product Prices
University of Chicago
A. Scott Keating
University of Chicago - Booth School of Business
Jerold L. Zimmerman
University of Rochester - Simon School of Business
Simon School of Business Working Paper No. FR 95-22
We argue that accounting depreciation either is the firm s calculation of the cost of a durable factor, or is information used in determining (implicitly or explicitly) the factor cost. Simple competitive-economic theory then implies a relation between accounting depreciation and product prices. We hypothesize that this relation is strengthened by various accounting techniques, including the inclusion of depreciation charges in standard costs, budgets and actual performance measures, as well as asset write-offs when actual performance persistently falls below budget. Evidence from two steel industry samples shows a significant relation between percentage changes in accounting depreciation and product prices. The data are too aggregate to provide a direct test of the hypothesis, so we plan a more direct test on product-level data.
JEL Classification: M41working papers series
Date posted: June 28, 1998
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