Corporate Investment and Changes in GAAP
Massachusetts Institute of Technology (MIT) - Sloan School of Management
October 21, 2014
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 evidence consistent with changes in accounting rules affecting investment decisions. I also examine two mechanisms through which changes in GAAP affect investment. First, I find that changes in GAAP affect on 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 (both capital and R&D expenditures). 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: 58
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: October 22, 2014
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