Strategic implications of mandatory depreciation rules

In this paper we examine the impact of accrual accounting rules on the strategic decisions of competing firms. We use a two period Cournot duopoly model to conclude that the different depreciation rules help shape the informational setting under which the firms take competitive decisions. We establish that the different mandatory depreciation rules aggregate costs differently, namely the way sunk costs are mixed with variable production costs in the income statement. This aggregation may prevent the perfect observation of either one of the costs to an outside observer, like a competitor. This gives rise to different informational environments that condition the competitive decisions of the firms. We also conclude that firms of different characteristics have different incentives to use the informational environment to their competitive advantage.