This monograph presents three variants of the neoclassical investment model and characterizes the firm's optimal investment policy, equity value, and the desirable properties of accrual accounting rules in each setting. Two main questions are considered: (1) What accounting rules result in the most informative financial statements from the perspective of investors seeking to value the firm's equity? and (2) What accounting rules can be efficiently used by shareholders in evaluating the performance of better informed managers? One accounting treatment, referred to as replacement cost accounting, achieves efficiency along both dimensions.

The notion of replacement cost studied in this monograph corresponds closely to that of fair value, as defined in IFRS 13, in that it is defined as either (i) the current price of the capital goods in a perfectly competitive market, if such a market is available, or (ii) the hypothetical amount that would have to be incurred today to replace the current and future capacity of the capital goods in question. While the replacement cost rule is, in many settings, unique in providing the firm's shareholders with sufficient information for precise equity valuation, the problem of efficient performance measurement is generally less informationally demanding. For example, under certain plausible conditions, the owners can incentivize a better informed manager to make efficient investment decisions using the straight-line depreciation method.