Financial Reporting Changes and the Internal Information Environment: Evidence from SFAS 142

61 Pages Posted: 12 Nov 2017 Last revised: 19 Aug 2019

See all articles by Qiang Cheng

Qiang Cheng

Singapore Management University

Young Jun Cho

Singapore Management University - School of Accountancy

Holly Yang

Singapore Management University - School of Accountancy

Date Written: November 1, 2017

Abstract

Using the adoption of SFAS 142 as an exogenous shock, we examine the effect of changes in financial reporting on firms’ internal information environment. SFAS 142 removed goodwill amortization and required firms to perform a two-step impairment test. We argue that complying with SFAS 142 induces managers to acquire new information and, therefore, improves managers’ information sets. Interviews with executives and auditors confirm this argument. Using a difference-in-differences design, we find that firms affected by SFAS 142 (i.e., treatment firms) experience an improvement in management forecast accuracy in the post-SFAS 142 period compared with those not affected. The increase is smaller for treatment firms with stronger monitoring mechanisms in the pre-SFAS 142 period and greater for firms with a higher likelihood of goodwill impairment. We further find that treatment firms with improvements in management forecast accuracy have higher M&A quality, internal capital allocation efficiency, and performance in the post-SFAS142 period than other treatment firms. Overall, our findings indicate that changes in external financial reporting can lead to better corporate decisions via their impact on the internal information environment.

Keywords: Financial reporting changes, internal information environment, SFAS 142, management forecasts, goodwill

JEL Classification: G34, M40, M48

Suggested Citation

Cheng, Qiang and Cho, Young Jun and Yang, Holly, Financial Reporting Changes and the Internal Information Environment: Evidence from SFAS 142 (November 1, 2017). Singapore Management University School of Accountancy Research Paper No. 2018-81, Available at SSRN: https://ssrn.com/abstract=3067756 or http://dx.doi.org/10.2139/ssrn.3067756

Qiang Cheng (Contact Author)

Singapore Management University ( email )

60 Stamford Road
Singapore, 178900
Singapore

Young Jun Cho

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore, 178900
Singapore

Holly Yang

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

HOME PAGE: http://sites.google.com/site/holly0417phd/

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