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Accrual Accounting, Informational Sufficiency, and Equity Valuation

Year: 2011

Type: article

Abstract: 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.

Source: Journal of Accounting Research

DOI: 10.1111/j.1475-679x.2011.00428.x

Author: ALEXANDER NEZLOBIN

Institutions: University of Southern California, New York University, Carnegie Mellon University, Columbia University, Stanford University

Language: English

Topic: Accounting Theory and Financial Reporting

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W1925705606

FWCI: 5.675

Cites: 34

Cited by: 21

Related to: 10