How Does Changing Measurement Change Management Behavior? A Review of the Evidence

Abstract

The effect of a change in accounting standards on reporting firms' economic behavior is often a concern raised by those opposing the accounting change. Some view these changes in behavior as an inevitable consequence of a rule change. Others are not persuaded by these arguments. Although the empirical evidence of changes in economic behavior is not extensive it is consistent with accounting changes resulting in firms changing both operating and financing decisions. The evidence of which economic incentives give rise to these changes is more limited. Changes in economic behavior appear to consistently be related to the regulatory use of accounting numbers. In addition some evidence related to incentives created by management compensation and by market discipline has been found. Evidence of the importance of debt covenants in inducing accounting changes is less convincing given limited examination of actual debt contracts and the use of poor proxies of covenant slack. The existing research does very little to tell us whether any changes in behavior are for the better or for the worse.

Keywords: Financial reporting, contracting, positive accounting

JEL Classification: M41, M44, G14, G30, G21, J33