Accounting alchemy

Abstract:

The controversy about the choice among accounting alternatives is often based on arguments suggesting heuristic behaviour by market participants and firm managers. Debates focus on whether accounting methodology systematically alters reported earnings and whether this effect may add or subtract economic value independently of any effect on underlying cash flows. Arguments based on heuristic behaviour of firms’ management and investors influence decisions about the applicability of standards and regulation.

JEL classification: M00; M40; G30; G14

Keywords: Earnings reporting; heuristic behaviour; fair value; disclosure