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Corporate Investment and Changes in GAAP

Nemit Shroff

Massachusetts Institute of Technology (MIT) - Sloan School of Management

July 20, 2016

Review of Accounting Studies, Forthcoming
MIT Sloan Research Paper No. 4972-12

This paper investigates whether changes in Generally Accepted Accounting Principles (GAAP) affect corporate investment decisions. Using a sample containing forty nine changes in GAAP, I find that changes in accounting rules affect investment decisions. I then examine two mechanisms through which changes in GAAP affect investment. First, I find that changes in GAAP affect investment, particularly R&D expenditures, when firms have financial covenants that are affected by changes in GAAP. Second, I find evidence suggesting that the process of complying with some changes in GAAP alters managers’ information sets and consequently changes their investment decisions, particularly their capital and R&D expenditures and to a weaker extent their acquistion expenditures. This paper contributes to the literature on the real effects of accounting by providing evidence that accounting rules affect investment decisions even when the rule change does not concern the measurement and reporting of investment, and by documenting specific mechanisms through which the relation manifests.

Number of Pages in PDF File: 68

Keywords: Investment; Capital expenditure; R&D; GAAP; Accounting quality; Financial reporting rules; Covenants; Financing constraints

JEL Classification: D9; G30; G31; M40; M41

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Date posted: December 28, 2011 ; Last revised: October 8, 2016

Suggested Citation

Shroff, Nemit, Corporate Investment and Changes in GAAP (July 20, 2016). Review of Accounting Studies, Forthcoming; MIT Sloan Research Paper No. 4972-12. Available at SSRN: https://ssrn.com/abstract=1977532 or http://dx.doi.org/10.2139/ssrn.1977532

Contact Information

Nemit Shroff (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
100 Main St.
Cambridge, MA MA 02142
United States
6173240805 (Phone)
HOME PAGE: http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=51407&co_list=F
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