Accrual Accounting, Informational Sufficiency, and Equity Valuation

Journal of Accounting Research, Forthcoming

47 Pages Posted: 25 Aug 2011

See all articles by Alexander Nezlobin

Alexander Nezlobin

New York University (NYU) - Leonard N. Stern School of Business

Date Written: August 23, 2011

Abstract

This paper studies accrual accounting and equity valuation in the context of a firm that makes repeated and overlapping investments in productive capacity. The analysis identifies a particular accrual accounting (depreciation) rule that is termed replacement cost accounting because the book value of existing capacity assets is set equal to the value that such assets would have if a competitive market were to exist for used assets. It is shown that replacement cost accounting aggregates past investment decisions of the firm without a loss of value-relevant information. The intrinsic value of the firm can then be expressed as a function of current accounting data and certain parameters of the firm's operating environment. Further, it is shown that replacement cost accounting is essentially the only accounting rule with this informational sufficiency property.

Keywords: equity valuation, accrual accounting, depreciation

JEL Classification: G29, M40, M41

Suggested Citation

Nezlobin, Alexander, Accrual Accounting, Informational Sufficiency, and Equity Valuation (August 23, 2011). Journal of Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1915637

Alexander Nezlobin (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

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