Anticipatory and Implementation Effects of FIN 46 on the Behavior of Different Market Participants

Asia-Pacific Journal of Accounting and Economics, Vol. 19, No. 1, 2012

Posted: 18 Jun 2008 Last revised: 10 Apr 2017

Umit G. Gurun

University of Texas at Dallas - Naveen Jindal School of Management

Alina Lerman

Yale School of Management

Joshua Ronen

New York University (NYU) - Department of Accounting

Date Written: June 15, 2009

Abstract

We examine whether FASB-mandated modifications of the consolidation rules (FIN 46 and FIN 46R) resulted in perceptible changes in market participants’ decisions as manifested in a variety of financial indicia. We find that financial analysts’ idiosyncratic precision of information decreased and equity market participants acted as if they perceived higher information risk, as evidenced by reduced earnings response coefficients, in anticipation of the guidance. We attribute these effects to a perceived increase in information risk and decrease in accounting information quality. We find that the actual implementation of the new rules reversed some of these effects. On the other hand, we find that information users that likely had access to information regarding the off-balance-sheet debt structures prior to 2001 did not exhibit a similar reaction to the apparent change in information risk either in anticipation or upon implementation of the new guidance. Specifically, we find that banks did not increase the loan spreads for FIN 46 firms and credit rating agencies lowered the ratings of these firms only marginally more than those of other firms. This finding is consistent with our conjecture that these entities were aware of the fundamentals of FIN 46 firms even under the prior limited disclosure regime. Overall, we conclude that the perceived information risk of firms that have previously structured a part of their operations in separate entities increased significantly with the expected promulgation of accounting guidance requiring them to bring in the previously off-balance-sheet assets, liabilities and results of operations into their financial statements. We interpret these results as evidence that these firms previously were assessed as having lower information risk relative to their peers within the equity market.

Keywords: Consolidation, FIN 46, FIN 46R, SFAS 167, Variable Interest Entity, Information Risk

JEL Classification: G14, G21, M41

Suggested Citation

Gurun, Umit G. and Lerman, Alina and Ronen, Joshua, Anticipatory and Implementation Effects of FIN 46 on the Behavior of Different Market Participants (June 15, 2009). Asia-Pacific Journal of Accounting and Economics, Vol. 19, No. 1, 2012. Available at SSRN: https://ssrn.com/abstract=1147294

Umit G. Gurun

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Alina Lerman

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Joshua Ronen (Contact Author)

New York University (NYU) - Department of Accounting ( email )

40 West 4th Street, Suite 400
Suite 10-180
New York, NY 10012-1118
United States
212-998-4144 (Phone)
212-995-4599 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~jronen/

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