IDEAS home Printed from https://ideas.repec.org/a/kap/rqfnac/v53y2019i1d10.1007_s11156-018-0742-5.html
   My bibliography  Save this article

The influence of uncertainty on the standard-setting decision between fair value and historical cost accounting under asymmetric information

Author

Listed:
  • Christian Blecher

    (Kiel University)

Abstract

The design of accounting rules by the international standard-setters takes place by considering a trade-off between relevance and reliability. An example for this trade-off is the standard-setting decision between fair value accounting—associated with more relevant information—and historical cost accounting—associated with more reliable information. This paper examines in which way the decision of a standard-setter between fair value and historical cost accounting is influenced by the uncertainty of the underlying assets, if the standard-setter wants to minimize the social costs of his standard-setting decision. As a first step this paper uses a common signaling model: Good firms—i.e. firms with high expected cash flows in the future—signal their firm type to an analyst by using discretionary accruals to manage earnings. As a second step the resulting signaling costs are compared with the analyst’s costs for determining the firm type by using his own valuation technology. The standard-setter chooses the accounting rule that minimizes the social costs.

Suggested Citation

  • Christian Blecher, 2019. "The influence of uncertainty on the standard-setting decision between fair value and historical cost accounting under asymmetric information," Review of Quantitative Finance and Accounting, Springer, vol. 53(1), pages 47-72, July.
    • Handle: RePEc:kap:rqfnac:v:53:y:2019:i:1:d:10.1007_s11156-018-0742-5
    DOI: 10.1007/s11156-018-0742-5
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s11156-018-0742-5
    File Function: Abstract
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s11156-018-0742-5?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Huong Higgins, 2011. "Forecasting stock price with the residual income model," Review of Quantitative Finance and Accounting, Springer, vol. 36(4), pages 583-604, May.
    2. Miller, Merton H & Rock, Kevin, 1985. "Dividend Policy under Asymmetric Information," Journal of Finance, American Finance Association, vol. 40(4), pages 1031-1051, September.
    3. Allen, Abigail & Ramanna, Karthik, 2013. "Towards an understanding of the role of standard setters in standard setting," Journal of Accounting and Economics, Elsevier, vol. 55(1), pages 66-90.
    4. Ruey Tsay & Yi-Mien Lin & Hsiao-Wen Wang, 2008. "Residual income, value-relevant information and equity valuation: a simultaneous equations approach," Review of Quantitative Finance and Accounting, Springer, vol. 31(4), pages 331-358, November.
    5. Vincent Chen & Samuel Tiras, 2015. "‘Other information’ as an explanatory factor for the opposite market reactions to earnings surprises," Review of Quantitative Finance and Accounting, Springer, vol. 45(4), pages 757-784, November.
    6. Keshin Tswei & Chen-Yin Kuo, 2012. "A Study of Stock Price Behavior in Taiwan via Residual Income Valuation Theory and Structural Identification," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 15(04), pages 1-26.
    7. Laux, Volker & Stocken, Phillip C., 2012. "Managerial reporting, overoptimism, and litigation risk," Journal of Accounting and Economics, Elsevier, vol. 53(3), pages 577-591.
    8. In-Koo Cho & David M. Kreps, 1987. "Signaling Games and Stable Equilibria," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 179-221.
    9. Mirko S. Heinle & Robert E. Verrecchia, 2016. "Bias and the Commitment to Disclosure," Management Science, INFORMS, vol. 62(10), pages 2859-2870, October.
    10. Iris Bergmann & Wolfgang Schultze, 2018. "Accounting based valuation: a simultaneous equations model for forecasting earnings to proxy for ‘other information’," Review of Quantitative Finance and Accounting, Springer, vol. 50(4), pages 1057-1091, May.
    11. Chen-Yin Kuo, 2017. "Is the accuracy of stock value forecasting relevant to industry factors or firm-specific factors? An empirical study of the Ohlson model," Review of Quantitative Finance and Accounting, Springer, vol. 49(1), pages 195-225, July.
    12. Stephen Penman, 2007. "Financial reporting quality: is fair value a plus or a minus?," Accounting and Business Research, Taylor & Francis Journals, vol. 37(S1), pages 33-44.
    13. Gjesdal, F, 1981. "Accounting For Stewardship," Journal of Accounting Research, Wiley Blackwell, vol. 19(1), pages 208-231.
    14. James A. Ohlson, 2001. "Earnings, Book Values, and Dividends in Equity Valuation: An Empirical Perspective," Contemporary Accounting Research, John Wiley & Sons, vol. 18(1), pages 107-120, March.
    15. Pengguo Wang, 2014. "On the relevance of earnings components in valuation and forecasting," Review of Quantitative Finance and Accounting, Springer, vol. 42(3), pages 399-413, April.
    16. Chaney, Paul K. & Lewis, Craig M., 1995. "Earnings management and firm valuation under asymmetric information," Journal of Corporate Finance, Elsevier, vol. 1(3-4), pages 319-345, April.
    17. Erb, Carsten & Pelger, Christoph, 2015. "“Twisting words”? A study of the construction and reconstruction of reliability in financial reporting standard-setting," Accounting, Organizations and Society, Elsevier, vol. 40(C), pages 13-40.
    18. Callen, Jeffrey L & Morel, Mindy, 2001. "Linear Accounting Valuation When Abnormal Earnings Are AR(2)," Review of Quantitative Finance and Accounting, Springer, vol. 16(3), pages 191-203, May.
    19. Linda H. Chen, 2013. "Income Smoothing, Information Uncertainty, Stock Returns, and Cost of Equity," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 16(03), pages 1-34.
    20. Bertomeu, Jeremy & Magee, Robert P., 2011. "From low-quality reporting to financial crises: Politics of disclosure regulation along the economic cycle," Journal of Accounting and Economics, Elsevier, vol. 52(2), pages 209-227.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Claudia Cătălina CIOCAN, 2022. "Historical Cost vs Fair Value in Accounting: Consequences for the Quality of Financial Information and the True and Fair View," CECCAR Business Review, Body of Expert and Licensed Accountants of Romania (CECCAR), vol. 3(10), pages 48-59, October.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Iris Bergmann & Wolfgang Schultze, 2018. "Accounting based valuation: a simultaneous equations model for forecasting earnings to proxy for ‘other information’," Review of Quantitative Finance and Accounting, Springer, vol. 50(4), pages 1057-1091, May.
    2. Cindy M. Vojtech, 2012. "The relationship between information asymmetry and dividend policy," Finance and Economics Discussion Series 2012-13, Board of Governors of the Federal Reserve System (U.S.).
    3. Chen-Yin Kuo, 2017. "Is the accuracy of stock value forecasting relevant to industry factors or firm-specific factors? An empirical study of the Ohlson model," Review of Quantitative Finance and Accounting, Springer, vol. 49(1), pages 195-225, July.
    4. Lin Nan & Xiaoyan Wen, 2019. "Penalties, Manipulation, and Investment Efficiency," Management Science, INFORMS, vol. 65(10), pages 4878-4900, October.
    5. Macve Richard, 2013. "“Trading Places”: A UK (and IFRS) Comment," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 4(1), pages 27-40, April.
    6. Zhang, Ying & Andrew, Jane, 2022. "Financialisation and the Conceptual Framework: An update," CRITICAL PERSPECTIVES ON ACCOUNTING, Elsevier, vol. 88(C).
    7. Dosis, Anastasios, 2018. "On signalling and screening in markets with asymmetric information," Journal of Mathematical Economics, Elsevier, vol. 75(C), pages 140-149.
    8. Kuo, Chen-Yin, 2016. "Does the vector error correction model perform better than others in forecasting stock price? An application of residual income valuation theory," Economic Modelling, Elsevier, vol. 52(PB), pages 772-789.
    9. Arturo Leccadito & Stefania Veltri, 2015. "A regime switching Ohlson model," Quality & Quantity: International Journal of Methodology, Springer, vol. 49(5), pages 2015-2035, September.
    10. Alex Edmans & William Mann, 2019. "Financing Through Asset Sales," Management Science, INFORMS, vol. 65(7), pages 3043-3060, July.
    11. Qi Liu & Dandan Song & Xiaolin Tang, 2021. "A Dynamic Growth Model with Equity for Guarantee Swap and Asymmetric Information," International Review of Finance, International Review of Finance Ltd., vol. 21(1), pages 37-57, March.
    12. Guoming Lai & Wenqiang Xiao, 2018. "Inventory Decisions and Signals of Demand Uncertainty to Investors," Manufacturing & Service Operations Management, INFORMS, vol. 20(1), pages 113-129, February.
    13. Cascino, Stefano & Clatworthy, Mark A. & Osma, Beatriz Garcia & Gassen, Joachim & Imam, Shahed, 2021. "The usefulness of financial accounting information: evidence from the field," LSE Research Online Documents on Economics 107569, London School of Economics and Political Science, LSE Library.
    14. Edmans, Alex, 2011. "Short-term termination without deterring long-term investment: A theory of debt and buyouts," Journal of Financial Economics, Elsevier, vol. 102(1), pages 81-101, October.
    15. Chemmanur, Thomas J. & Ravid, S. Abraham, 1999. "Asymmetric Information, Corporate Myopia, and Capital Gains Tax Rates: An Analysis of Policy Prescriptions," Journal of Financial Intermediation, Elsevier, vol. 8(3), pages 205-231, July.
    16. Hull, Tyler J., 2015. "How the timing of dividend reductions can signal value," Journal of Corporate Finance, Elsevier, vol. 30(C), pages 114-131.
    17. Christoph Kuhner & Christoph Pelger, 2015. "On the Relationship of Stewardship and Valuation—An Analytical Viewpoint," Abacus, Accounting Foundation, University of Sydney, vol. 51(3), pages 379-411, September.
    18. Bernheim, B. Douglas & Bodoh-Creed, Aaron L., 2023. "Pervasive signaling," Theoretical Economics, Econometric Society, vol. 18(1), January.
    19. Brandon Gipper & Brett J Lombardi & Douglas J Skinner, 2013. "The politics of accounting standard-setting: A review of empirical research," Australian Journal of Management, Australian School of Business, vol. 38(3), pages 523-551, December.
    20. Kaya, Ayça, 2009. "Repeated signaling games," Games and Economic Behavior, Elsevier, vol. 66(2), pages 841-854, July.

    More about this item

    Keywords

    Standard-setting; Signaling; Earnings management; Asymmetric information;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:kap:rqfnac:v:53:y:2019:i:1:d:10.1007_s11156-018-0742-5. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.