Corporate Investment and Changes in GAAP
Massachusetts Institute of Technology (MIT) - Sloan School of Management
July 20, 2016
Review of Accounting Studies, Forthcoming
MIT Sloan Research Paper No. 4972-12
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.
Number of Pages in PDF File: 68
Keywords: Investment; Capital expenditure; R&D; GAAP; Accounting quality; Financial reporting rules; Covenants; Financing constraints
JEL Classification: D9; G30; G31; M40; M41
Date posted: December 28, 2011 ; Last revised: July 21, 2016
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