Economic and Industry Determinants of Accounting Method Choice

50 Pages Posted: 27 Jun 2000

See all articles by Robert M. Bowen

Robert M. Bowen

Univeristy of San Diego - School of Business; University of Washington - Foster School of Business; Foster School of Business ; University of San Diego - Department of Accountancy

Larry DuCharme

University of Washington

D. Shores

University of Washington - Department of Accounting

Date Written: September 17, 1999

Abstract

This study synthesizes and extends the prior literature examining economic motives for manager's accounting method choices. First, we present a framework for organizing the economic factors that potentially influence managers' accounting decisions. We apply our framework to examine inventory and depreciation method choices because they are directly observable and have large sustained effects on earnings. Second, we present descriptive statistics on the distribution of these and combined-method choices for the years 1984, 1990, and 1996. Both firm and industry level data show a preponderance of income-increasing methods in each year as well as a trend toward more income-increasing methods over time. Third, we identify 19 independent variables (largely drawn from the past 20 years of research) to explain the inventory, depreciation, and combined-method choices of over 2,000 firms for the years 1984, 1990 and 1996. Taken together, these variables explain a high percentage of the cross-sectional variation in method choices (e.g., adjusted R2 of 23%-27% for combined-method choices). Finally, we add variables that proxy for industry determinants of accounting method choice, which increases total explanatory power to 28%-37% for combined-method choices. Both sets of variables, economic and industry, have incremental explanatory power over the other. Given earlier studies often explained less than 5%, our results suggest that, cumulatively, the accounting literature has made considerable progress in identifying economic factors associated with managers' accounting method choices.

JEL Classification: M41, M43, M44, K12, L15, J32, J51

Suggested Citation

Bowen, Robert M. and DuCharme, Larry and Shores, D., Economic and Industry Determinants of Accounting Method Choice (September 17, 1999). Available at SSRN: https://ssrn.com/abstract=182888 or http://dx.doi.org/10.2139/ssrn.182888

Robert M. Bowen (Contact Author)

Univeristy of San Diego - School of Business ( email )

5998 Alcala Park
San Diego, CA 92110-2492
United States

HOME PAGE: http://https://www.sandiego.edu/business/undergraduate/accountancy/biography.php?profile_id=1799

University of Washington - Foster School of Business ( email )

Box 353226
University of Washington
Seattle, WA 98195-3226
United States

HOME PAGE: http://https://foster.uw.edu/faculty-research/directory/robert-bowen/

Foster School of Business ( email )

557 Paccar Hall
Seattle, WA 98195
United States
(206) 543-4569 (Phone)
(206) 685-9392 (Fax)

HOME PAGE: http://faculty.washington.edu/rbowen/

University of San Diego - Department of Accountancy ( email )

223 Olin Hall
5998 Alcalá Park
San Diego, CA 92110
United States
619.260.2385 (Phone)

HOME PAGE: http://www.sandiego.edu/business/directory/biography.php?id=1232

Larry DuCharme

University of Washington ( email )

Box 353200
School of Business Administration 231 Mackenzie Hall
Seattle, WA 98195-3200
United States

D. Shores

University of Washington - Department of Accounting ( email )

224 Mackenzie Hall, Box 353200
Seattle, WA 98195-3200
United States
206-543-5605 (Phone)
206-685-9392 (Fax)

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