Do the FASB's Standards add Shareholder Value?
Columbia Business School - Accounting, Business Law & Taxation
University of Texas at Dallas - Naveen Jindal School of Management
Columbia Business School
Duke University - Fuqua School of Business
October 1, 2016
Columbia Business School Research Paper No. 16-78
We examine the cost effectiveness, from the shareholders’ perspective, of the accounting standards issued by the FASB during 1973-2009. In particular, we evaluate (i) the stock market reactions of firms affected by the standards surrounding the events that changed the probability of issuance of these standards; and (ii) whether the market reactions are related, in the cross-section, to affected firms’ agency problems, information asymmetry, proprietary costs, contracting costs, and estimation risk changes. The average standard is a non-event from the investors’ perspective. We find that 104 of the 138 standards we examine are associated with no change in shareholder value. Thirty-four standards are associated with significant abnormal returns. Of these 19 (15) are shareholder value decreasing (increasing). Thus, a mere 11% of the standards improve shareholder value. The fair value pronouncements (SFAS 105, 107, 115) and the R&D expensing standard (SFAS 2) cause the highest negative stock price reaction whereas standards related to the securitization of mortgage backed securities (SFAS 134) and the disclosure of derivative instruments (SFAS 119) are associated with the highest positive returns. Surprisingly, 25 standards are associated with an increase in estimation risk. Stock returns associated with standards are higher for affected firms that experience a decrease in estimation risk. Principles-based standards are associated with more positive stock price reactions relative to rules-based standards. However, standards that involve more managerial estimates are associated with negative stock price reactions.
Number of Pages in PDF File: 93
Keywords: Standard Setting, FASB, Disclosure, Shareholder Value
JEL Classification: G14, G28, G32, M41
Date posted: November 2, 2016 ; Last revised: November 11, 2016