Principles vs. Rules and the Information Environment: The Case of SFAS 95
44 Pages Posted: 4 Sep 2013
Date Written: August 2013
Abstract
We provide evidence on the “principles vs. rules” standards debate by examining how changes in cash flow reporting methods required by SFAS 95 Statement of Cash Flows affected firms’ information environments. We argue that adoption of SFAS 95 represented a change from a principle based standard (APB 19) to a rules based standard. Using a difference-in-difference research design, we find for firms required to adopt its provisions (mandatory switchers), SFAS 95 resulted in a deterioration in their information environments, as evidenced by increases in bid-ask spreads and stock return synchronicity as well as decreases in trading volume and analyst coverage. Firms with richer information environments exhibit a mitigated response. Information environments deteriorated more when cash flow information is arguably more important. In addition, the evidence does not indicate the deterioration is mitigated when firms are in industries that experienced greater increases in industry reporting conformity. Together, these findings are consistent with firms, on average, using their reporting discretion to convey private information to investors.
Keywords: rules-based accounting standards, principles-based accounting standards, information environment, SFAS 95 Statement of Cash Flows
JEL Classification: M40, M41
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
International Accounting Standards and Accounting Quality
By Mary E. Barth, Wayne R. Landsman, ...
-
Mandatory IFRS Reporting Around the World: Early Evidence on the Economic Consequences
By Holger Daske, Luzi Hail, ...
-
International Financial Reporting Standards (IFRS): Pros and Cons for Investors
By Ray Ball
-
Financial Statement Effects of Adopting International Accounting Standards: the Case of Germany
By Mingyi Hung and K.r. Subramanyam
-
Market Reaction to the Adoption of IFRS in Europe
By Chris Armstrong, Mary E. Barth, ...
-
Market Reaction to the Adoption of IFRS in Europe
By Chris Armstrong, Mary E. Barth, ...
-
By Vicentiu Covrig, Mark L. Defond, ...
-
By Vicentiu M. Covrig and Mark L. Defond
-
Adopting a Label: Heterogeneity in the Economic Consequences Around IAS/IFRS Adoptions
By Holger Daske, Luzi Hail, ...