The Adjustment of Security Returns to the Disclosure of Replacement Cost Accounting Information

Abstract

Continuing inflation in recent years has highlighted potential problems with historical cost (HC) accounting. Those who are concerned with the insufficiency of this measurement basis argue that during periods of substantive inflation. He accounting data can give a false impression of earnings and financial strength that lead to the erosion of a firms capital base [e.g. AICPA (1963), APB (1969), Gynther (1970), Sterling (1975) , FASB (1979) , Connor (1979) J . To corret this situation, .the disclosure of replacement cost (RC) data (or similar current cost data) in financial reports has often been suggested [e.g. ,Edwards and Bell (1961), Wright (1975), Mathews (1968), Revsine (1970), Revine and Weygandt (1974) , FASB (1979) J . In view of the alleged importance of RC accounting data in an inflationary

economy, the Securities and Exchange Commission (SEC) amended Rule 3-17 of Regulation S-X in March 1976, thus mandating the public disclosure of certain RC accounting data by its registrants.