Principles vs. Rules and the Information Environment: The Case of SFAS 95

44 Pages Posted: 4 Sep 2013

See all articles by Stephen Brown

Stephen Brown

University of Maryland - Department of Accounting & Information Assurance

Stephen A. Hillegeist

Arizona State University (ASU) - W. P. Carey School of Business, School of Accountancy

Steven F. Orpurt

Arizona State University; Singapore Management University

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

Brown, Stephen and Hillegeist, Stephen A. and Orpurt, Steven F., Principles vs. Rules and the Information Environment: The Case of SFAS 95 (August 2013). Robert H. Smith School Research Paper, Available at SSRN: https://ssrn.com/abstract=2320070 or http://dx.doi.org/10.2139/ssrn.2320070

Stephen Brown

University of Maryland - Department of Accounting & Information Assurance ( email )

Robert H. Smith School of Business
College Park, MD 20742-9157
United States

Stephen A. Hillegeist (Contact Author)

Arizona State University (ASU) - W. P. Carey School of Business, School of Accountancy ( email )

Tempe, AZ 85287-3706
United States
480-965-6614 (Phone)

Steven F. Orpurt

Arizona State University ( email )

300 Lemon Street
PO Box 873606
Tempe, AZ 85287-3606
United States
480 965 2393 (Phone)

Singapore Management University ( email )

Li Ka Shing Library
70 Stamford Road
Singapore 178901, 178899
Singapore

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
122
Abstract Views
1,717
rank
249,272
PlumX Metrics