On Cost Tradeoffs between Conservative and Market Value Accounting

REVIEW OF ACCOUNTING STUDIES, Vol. 2, No. 1, 1997

Posted: 17 Sep 1997

See all articles by Joseph Bachar

Joseph Bachar

Arthur Andersen, Israel

Nahum D. Melumad

Columbia Business School - Accounting, Business Law & Taxation

Abstract

We identify a cost tradeoff relevant to the comparison of alternative accounting regimes. We compare equilibrium deadweight losses, due to transacting and auditing, across the historical cost, lower-of-cost-or-market, and market value regimes. We provide conditions for each of the regimes to dominate the other two. We show that while market-value accounting is likely to prevail in an inflationary setting, it may also be optimal under deflation. Similarly, lower-of- cost-or-market is likely to prevail in a deflationary setting, though it may also be optimal under inflation. Last, historical cost prevails only if the variation in asset prices is sufficiently high.

JEL Classification: M41, M44

Suggested Citation

Bachar, Joseph (Yossi) and Melumad, Nahum D., On Cost Tradeoffs between Conservative and Market Value Accounting. REVIEW OF ACCOUNTING STUDIES, Vol. 2, No. 1, 1997, Available at SSRN: https://ssrn.com/abstract=10634

Joseph (Yossi) Bachar

Arthur Andersen, Israel

Luboshitz, Kasierer & Co.
Noam House Shazar Avenue
Beer Sheva 84894
Israel

Nahum D. Melumad (Contact Author)

Columbia Business School - Accounting, Business Law & Taxation ( email )

3022 Broadway
611 Uris
New York, NY 10027
United States
212-854-2475 (Phone)

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