68 Pages Posted: 28 Dec 2011 Last revised: 1 Mar 2017
Date Written: March 1, 2017
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.
Keywords: Investment; Capital expenditure; R&D; GAAP; Accounting quality; Financial reporting rules; Covenants; Financing constraints
JEL Classification: D9; G30; G31; M40; M41
Suggested Citation: Suggested Citation
Shroff, Nemit, Corporate Investment and Changes in GAAP (March 1, 2017). Review of Accounting Studies, Vol. 22, No. 1, pp. 1–63, March 2017; MIT Sloan Research Paper No. 4972-12. Available at SSRN: https://ssrn.com/abstract=1977532 or http://dx.doi.org/10.2139/ssrn.1977532