Many of my former MAcc and MBA students will (hopefully) remember my discussions in class about how historical cost can potentially distort accounting-based rates of return (like return on assets - ROA) in my mind this lead to a possible comparability concern with accounting.
My coauthor, Melissa Lewis (also an Assistant professor at Utah) and I decided to test whether this is actually the case for a wide sample of firms - and we do indeed find evidence of an inflation in ROA for firms with older assets. More startling, even though we all know about historical cost, we find that investors appear to be unable to correctly estimate the level of this bias, leading to predictable negative future returns - you can read about our paper on SSRN.
