Strategic Consequences of Historical Cost and Fair Value Measurements

45 Pages Posted: 26 Mar 2007

See all articles by Ricardo Ferreira Reis

Ricardo Ferreira Reis

Catholic University of Portugal - FCEE-Catolica

Phillip C. Stocken

Dartmouth College - Tuck School of Business

Abstract

This paper examines the measurement of non-financial assets in imperfectly competitive markets and considers the effect of alternative measurements on firms' investing and operating activities. We analyze a duopoly where each firm manufactures, reports, and thereafter sells its inventory. We initially characterize the informativeness of a firm's accounting report when it is prepared using historical cost and find a firm's report does not always reveal its level of inventory. We then characterize the informativeness of a report when it is prepared using fair value and find it completely reveals a firm's inventory holding. We highlight the difficulty of implementing fair value measurements that arise because fair value is an endogenous consequence of the strategic interaction between firms.

Keywords: Historical cost, Fair value, Edgeworth-Bertrand game, Endogenous expectations

JEL Classification: D43, D83, L13, M41

Suggested Citation

Reis, Ricardo F. and Stocken, Phillip C., Strategic Consequences of Historical Cost and Fair Value Measurements. Contemporary Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=975445

Ricardo F. Reis

Catholic University of Portugal - FCEE-Catolica ( email )

Palma de Cima
P-1649-023 Lisbon, Porto 4169-005
Portugal
+351217214270 (Phone)

Phillip C. Stocken (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States
603-646-2843 (Phone)

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