The Effect of Alternative Accounting Rules for Nonsubsidiary Investments

The purpose of this paper is to provide some empirical evidence regarding a controversy over the proper method of valuing and measuring income from nonsubsidiary investments. This controversy is part of the general dispute over whether historical cost or market values should be used as the basis for asset valuation and income determinations Our concern is focused primarily on the support for a shift from historical cost to market values provided by several recent reports of the Concepts and Standards Committees of the American Accounting Association.2 All the reports on inventory, long-lived assets, realization, and matching have acclaimed the virtues of using a market basis of accounting. Their reasons are based upon a priori assessments of the benefits to be gained from this shift. These benefits include the timeliness of reporting gains and losses, better evaluation of managerial efficiency, and less opportunity for manipulation. No empirical evaluations of this controversy have been made, and for one good reason. It is difficult, if not virtually impossible, to obtain