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Accrual accounting, informational sufficiency, and equity valuation

Nezlobin, Alexander (2012) Accrual accounting, informational sufficiency, and equity valuation. Journal of Accounting Research, 50 (1). 233 - 273. ISSN 0021-8456

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Identification Number: 10.1111/j.1475-679X.2011.00428.x

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.

Item Type: Article
Official URL: https://onlinelibrary.wiley.com/journal/1475679x
Additional Information: © 2011 University of Chicago on behalf of the Accounting Research Center
Divisions: Accounting
Subjects: H Social Sciences > HF Commerce > HF5601 Accounting
H Social Sciences > HG Finance
Date Deposited: 04 Nov 2019 12:06
Last Modified: 20 Jan 2020 07:07
URI: http://eprints.lse.ac.uk/id/eprint/102354

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