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Strategic Consequences of Historical Cost and Fair Value Measurements *
Author(s) -
Reis Ricardo F.,
Stocken Phillip C.
Publication year - 2007
Publication title -
contemporary accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.769
H-Index - 99
eISSN - 1911-3846
pISSN - 0823-9150
DOI - 10.1506/0274-9457-gp27-5215
Subject(s) - value (mathematics) , business , economics , mathematics , statistics
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.