Corporate Investment and Changes in GAAP

Abstract:     
This paper investigates whether changes in Generally Accepted Accounting Principles (GAAP) affect corporate investment decisions. Using a sample containing forty–nine changes in GAAP, the evidence is consistent with changes in accounting rules affecting investment decisions. I then examine two mechanisms through which changes in GAAP affect investment. First, I find that managers of firms with financial covenants invest more (less) when the change in GAAP increases (decreases) covenant slack. Second, I find evidence suggesting that the process of complying with certain changes in GAAP alters managers’ information sets and consequently changes their investment decisions. This paper contributes to the literature on the real effects of accounting by providing evidence that accounting rules affect investment decisions and by documenting specific mechanisms through which the relation manifests.

Number of Pages in PDF File: 59

Keywords: Investment, Investment Efficiency, Capital Expenditure, R&D, GAAP, Accounting Changes, Covenants

JEL Classification: D9, G30, G31, M40, M41

working papers series