Date Added: Mar 2010
The controversy about the choice among accounting alternatives is often based on arguments suggesting heuristic behavior 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 behavior of firms' management and investors influence decisions about the applicability of standards and regulation. The answer to why we observe accounting alchemy is probably a combination of many factors. And, it is likely that not all managers' practice accounting alchemy and not all investors are heuristic.