Corporate investment and changes in GAAP

By Nemit Shroff. Review of accounting studies, 2016

203 citations recorded by the source corpus.

This paper investigates whether changes in Generally Accepted Accounting Principles (GAAP) affect corporate investment decisions. Using a sample containing forty nine changes in GAAP, I find that changes in accounting rules affect investment decisions. I then examine two mechanisms through which changes in GAAP affect investment. First, I find that changes in GAAP affect investment, particularly R&D expenditures, when firms have financial covenants that are affected by changes in GAAP. Second, I find evidence suggesting that the process of complying with some changes in GAAP alters managers’ information sets and consequently changes their investment decisions, particularly their capital and R&D expenditures and, to a weaker extent, their acquistion expenditures. This paper contributes to the literature on the real effects of accounting by providing evidence that accounting rules affect investment decisions even when the rule change does not concern the measurement and reporting of investment, and by documenting specific mechanisms through which the relation manifests.

Subfields: Economics and Econometrics, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/e1cbaef6ba1ce731064512ae5e1bc87e2b57e15d

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Citations in the corpus

• The impact of carbon disclosure mandates on emissions and financial operating performance (2020, background): “8 Prior studies document real effects of disclosure regulation on investment (Biddle and Hilary 2006; Biddle et al. 2009; Graham et al. 2011; Cheng et al. 2013; Shroff et al. 2014; Shroff 2017), mine safety Christensen et al.”
• Mandatory CSR and sustainability reporting: economic analysis and literature review (2019, unknown): “…and spending behavior (e.g., Dukes et al. 1980; Holthausen and Leftwich 1983; Choudhary et al. 2009; Hayes et al. 2012); and (iii) managers learn from peer reporting or use it for benchmarking and subsequently adjust their investments (e.g., Beatty et al. 2013; Chen et al. 2013; Shroff 2017).”
• Management Forecast Quality and Capital Investment Decisions (2014, unknown): “To determine whether a firm’s investment levels deviate from expected investment levels, we use a benchmark investment model based on prior research on investment efficiency (McNichols and Stubben 2008; Biddle et al. 2009; Shroff 2013).”
• Common Auditors in M&A Transactions (2016, unknown): “…by reducing agency problems caused by information asymmetry (e.g., Biddle et al., 2009; Biddle and Hilary, 2006), by providing peer firms with more information (e.g., Badertscher et al., 2013), and by providing information to managers within the firm (Shroff, 2014; McNichols and Stubben, 2008).”
• Anatomy of Corporate Borrowing Constraints* (2020, unknown): “…significant impact on firms’ financial and real decisions due to debt covenants (Brown and Lee, 2007; Frankel, Lee, and McLaughlin, 2010; Moser, Newberry, and Puckett, 2011; Shroff, 2017).23 SFAS 123(r) is most relevant to our study, as it directly relates to the calculation of operating earnings.”
• The Effect of Accounting Conservatism on Corporate Investment during the Global Financial Crisis: THE EFFECT OF ACCOUNTING CONSERVATISM (2016, unknown): “Prior studies (e.g., Biddle and Hilary 2006; Biddle et al. 2009; Badertscher et al. 2013; Francis and Martin 2010; Goodman et al. 2014; Shroff 2014; Shroff et al. 2014) provide evidence that financial reporting affects investment efficiency.”
• The effects of financial reporting and disclosure on corporate investment: A review (2019, unknown): “To test this prediction, Shroff (2017) uses cross-sectional variation in the characteristics of several changes in GAAP and classifies them as more or less likely to provide managers with additional decision-relevant information upon compliance.46 He finds that changes in GAAP that are more likely…”