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Corporate Investment and Changes in GAAP

Nemit Shroff

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

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Date posted: December 28, 2011 ; Last revised: October 22, 2014

Suggested Citation

Shroff, Nemit, Corporate Investment and Changes in GAAP (October 21, 2014). MIT Sloan Research Paper No. 4972-12. Available at SSRN: http://ssrn.com/abstract=1977532 or http://dx.doi.org/10.2139/ssrn.1977532

Contact Information

Nemit Shroff (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
77 Massachusetts Ave.
Cambridge, MA 02142
United States
6173240805 (Phone)
HOME PAGE: http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=51407&co_list=F
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