The Power of the Default: Investors’ Reactions to Default Amortization Periods and Deviations Therefrom

37 Pages Posted: 4 Aug 2022 Last revised: 22 Mar 2023

See all articles by Shana Clor-Proell

Shana Clor-Proell

Texas Christian University - Department of Accounting

Shannon Garavaglia

University of Pittsburgh - Accounting Group

Lisa Koonce

University of Texas

Jane M. Thayer

Georgia Institute of Technology

Date Written: July 28, 2022

Abstract

As standard setters deliberate the accounting for intangibles, the idea of establishing a default useful life with an option to deviate could reduce the costs and complexities inherent in estimating the useful lives of these assets. Across three experiments, we investigate investors’ reactions to companies that utilize versus deviate from a default useful life set by standard setters. We find that investors believe (1) a mandated default life is more of an endorsement of that life than are deviations from it, and (2) companies that deviate will have more difficulty determining the useful life and will face increased scrutiny and justification demands. These insights generally hold whether the deviation results in a shorter or longer expected life, and they become more pronounced as the magnitude of deviation increases. Despite this finding, we observe that investors do not generally view a company’s useful life choice as informative about their true beliefs and judged future economic benefits of the intangible. Collectively, the results suggest that investors view deviations from a default as imposing costs on firms, but not conveying credible information about managers’ true beliefs regarding the economic benefits of the asset. Our findings are informative to standard setters and firm managers.

Keywords: Intangibles, amortization, default, endorsement

JEL Classification: M40

Suggested Citation

Clor-Proell, Shana and Garavaglia, Shannon and Koonce, Lisa L. and Thayer, Jane M., The Power of the Default: Investors’ Reactions to Default Amortization Periods and Deviations Therefrom (July 28, 2022). Available at SSRN: https://ssrn.com/abstract=4175534 or http://dx.doi.org/10.2139/ssrn.4175534

Shana Clor-Proell (Contact Author)

Texas Christian University - Department of Accounting ( email )

M.J. Neeley School of Business
TCU Box 298530
Fort Worth, TX 76129
United States

Shannon Garavaglia

University of Pittsburgh - Accounting Group ( email )

United States

Lisa L. Koonce

University of Texas ( email )

Dept. of Accounting
McCombs School of Business
Austin, TX 78712
United States
512-471-5576 (Phone)
512-471-3904 (Fax)

Jane M. Thayer

Georgia Institute of Technology

Atlanta, GA 30332
United States

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