Capital Allocation and Timely Accounting Recognition of Economic Losses

Journal of Business, Finance and Accounting, Vol. 38, Nos. 1 & 2, 2011

53 Pages Posted: 4 Jan 2011

See all articles by Robert M. Bushman

Robert M. Bushman

University of North Carolina Kenan-Flagler Business School

Joseph D. Piotroski

Stanford Graduate School of Business

Abbie J. Smith

University of Chicago - Booth School of Business

Multiple version iconThere are 2 versions of this paper

Abstract

This paper explores direct relations between corporate investment behavior and the timeliness of accounting recognition of economic losses (TLR) reflected in a country’s accounting regime. We explicitly investigate the extent to which TLR influences investment decisions of firm managers. Given the asymmetric emphasis on negative outcomes inherent in TLR, we hypothesize that TLR will most strongly influence investment behavior when managers face deteriorating investment environments. We conjecture that TLR will have an asymmetric impact on investment behavior whereby TLR impacts firms’ investment decisions in the face of declining investment opportunities, but not in the face of increasing in investment opportunities. Using firm-level investment decisions spanning twenty five countries, we find that investment responses to declining opportunities increases with TLR, while we find no evidence that TLR influences the sensitivity of investment to increasing investment opportunities. Our results are robust to alternative estimates of TLR, alternative estimates of investment responses to changing investment opportunities, and to controls for important country-level, industry-level, and firm-level variables that may impact firms’ investment decisions.

Keywords: Investment, accounting, governance, timely loss recognition

JEL Classification: M41, G31, D21

Suggested Citation

Bushman, Robert M. and Piotroski, Joseph D. and Smith, Abbie J., Capital Allocation and Timely Accounting Recognition of Economic Losses. Journal of Business, Finance and Accounting, Vol. 38, Nos. 1 & 2, 2011. Available at SSRN: https://ssrn.com/abstract=1734447

Robert M. Bushman (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-9809 (Phone)

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/bushmanr/

Joseph D. Piotroski

Stanford Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

Abbie J. Smith

University of Chicago - Booth School of Business ( email )

1101 East 58th Street
Graduate School of Business
Chicago, IL 60637-1561
United States
773-702-7295 (Phone)
773-702-0458 (Fax)

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