The Valuation Consequences of Voluntary Accounting Changes

44 Pages Posted: 13 Oct 2005 Last revised: 4 Mar 2018

See all articles by James S. Linck

James S. Linck

Southern Methodist University (SMU) - Finance Department

Thomas J. Lopez

University of Alabama - Culverhouse School of Accountancy

Lynn L. Rees

Utah State University - Huntsman School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: August 1, 2006

Abstract

Firm management typically claims that voluntary accounting method changes (VACs) are made to enhance the informativeness of earnings by better matching accounting practices with economic reality. In contrast, skeptics argue that managers adopt new accounting procedures to opportunistically manage earnings and influence their firm's stock price. In this paper, we investigate these alternative motives for VACs. Specifically, we investigate whether VACs cause equity prices to deviate from their fundamental values in the short-term by studying the long-run stock price performance for a sample of firms that voluntarily change accounting methods. In addition, we investigate changes in earnings informativeness by examining the behavior of earning response coefficients and the relationship between earnings and future cash flows in years surrounding the VAC event. In contrast to prior research, we find little evidence that a strategy based solely on the earnings effect of a VAC can generate abnormal returns. While we find weak evidence of post-VAC abnormal returns for extreme VACs, this result appears to be driven by the accruals anomaly documented in Sloan (1996). Our evidence further suggests that earnings informativeness is not significantly altered by voluntary changes in accounting methods. Taken together, our evidence suggests the market recognizes the financial statement effects of alternative acceptable accounting methods and efficiently processes the valuation implications of VACs.

Keywords: Accounting changes, accruals anomaly, market efficiency, earnings management, earnings fixation

JEL Classification: G14, M41, M43

Suggested Citation

Linck, James S. and Lopez, Thomas J. and Rees, Lynn L., The Valuation Consequences of Voluntary Accounting Changes (August 1, 2006). The Accounting Review, Vol. 88, No. 6, 2014. Available at SSRN: https://ssrn.com/abstract=820604 or http://dx.doi.org/10.2139/ssrn.820604

James S. Linck

Southern Methodist University (SMU) - Finance Department ( email )

United States

Thomas J. Lopez

University of Alabama - Culverhouse School of Accountancy ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States
205-348-2907 (Phone)

Lynn L. Rees (Contact Author)

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322-3500
United States
435-797-2272 (Phone)

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