Depreciation Policy Changes: Tax, Earnings Management, and Investment Opportunity Incentives

35 Pages Posted: 20 Apr 1999  

A. Scott Keating

University of Chicago - Booth School of Business

Jerold L. Zimmerman

University of Rochester - Simon Business School

Date Written: March 29, 1999

Abstract

Contrary to previous studies, we find that managers change depreciation methods and/or revise depreciation estimates in predictable ways. Our tests differ from prior ones because we examine more dimensions of depreciation policy changes and managers? discretion over those dimensions. Managers change depreciation policies in response to tax law changes, poor performance and changes in investment opportunities. First, a 1981 tax law altered the frequency and type of estimate revisions and method changes. Second, managers adopting income-increasing method changes for both new and existing assets experience poorer performance than those who adopt income-increasing method changes only for new assets. Finally, non-income-increasing policy changes appear to be in response to changes in firms? investment opportunities.

JEL Classification: M41, M44, K34

Suggested Citation

Keating, A. Scott and Zimmerman, Jerold L., Depreciation Policy Changes: Tax, Earnings Management, and Investment Opportunity Incentives (March 29, 1999). Simon School of Business Working Paper No. FR 99-06. Available at SSRN: https://ssrn.com/abstract=161526 or http://dx.doi.org/10.2139/ssrn.161526

A. Scott Keating (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-4078 (Phone)
773-702-0458 (Fax)

Jerold L. Zimmerman

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States
585-275-3397 (Phone)
585-442-6323 (Fax)

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