Economic Consequences of Firms' Depreciation Method Choice: Evidence from Capital Investments

Posted: 12 Feb 2008 Last revised: 18 Apr 2017

See all articles by Scott B. Jackson

Scott B. Jackson

University of South Carolina

Xiaotao Kelvin Liu

Northeastern University - Accounting Group

Mark Cecchini

University of South Carolina

Multiple version iconThere are 2 versions of this paper

Date Written: August 9, 2008

Abstract

This study identifies several interrelated reasons why firms' depreciation method choice is likely to influence managers' capital investment decisions. We find that firms that use accelerated depreciation make significantly larger capital investments than firms that use straight-line depreciation. Further, we find that there has been a migration away from accelerated depreciation to straight-line depreciation over the past two decades. Firms that make such accounting changes make smaller capital investments in the post-change periods than in the pre-change periods. These results suggest that a choice made for external financial reporting purposes influences managers' capital investment decisions.

Keywords: Accounting depreciation, depreciation method choice, economic consequences, accounting book value, capital investments, straight-line depreciation, accelerated depreciation

JEL Classification: G31, M21, M40, M41, M46, M44

Suggested Citation

Jackson, Scott B. and Liu, Xiaotao Kelvin and Cecchini, Mark, Economic Consequences of Firms' Depreciation Method Choice: Evidence from Capital Investments (August 9, 2008). Journal of Accounting & Economics (JAE), Vol. 48, No. 1, 2009, Available at SSRN: https://ssrn.com/abstract=1092419

Scott B. Jackson (Contact Author)

University of South Carolina ( email )

School of Accounting
Moore School of Business
Columbia, SC 29208
United States
(803) 777-3100 (Phone)

Xiaotao Kelvin Liu

Northeastern University - Accounting Group ( email )

404B Hayden Hall
360 Huntington Avenue
Boston, MA 02115
United States
617-373-5926 (Phone)

Mark Cecchini

University of South Carolina ( email )

The Francis M. Hipp Building
1705 College Street
Columbia, SC 29208
United States

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