Depreciation Policy Changes: Tax, Earnings Management, and Investment Opportunity Incentives

Abstract:     
Contrary to previous studies, we find that managers change depreciation methods and/or revise depreciation estimates in predictable ways. Our tests differ from prior ones because we examine more dimensions of depreciation policy changes and managers? discretion over those dimensions. Managers change depreciation policies in response to tax law changes, poor performance and changes in investment opportunities. First, a 1981 tax law altered the frequency and type of estimate revisions and method changes. Second, managers adopting income-increasing method changes for both new and existing assets experience poorer performance than those who adopt income-increasing method changes only for new assets. Finally, non-income-increasing policy changes appear to be in response to changes in firms? investment opportunities.

Number of Pages in PDF File: 35

JEL Classification: M41, M44, K34

working papers series