Corporate investment and changes in GAAP

Nemit Shroff ()
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Nemit Shroff: Massachusetts Institute of Technology

Review of Accounting Studies, 2017, vol. 22, issue 1, No 1, 63 pages

Abstract: Abstract This paper investigates whether changes in Generally Accepted Accounting Principles (GAAP) affect corporate investment decisions. Using a sample containing forty nine changes in GAAP, I find that changes in accounting rules affect investment decisions. I then examine two mechanisms through which changes in GAAP affect investment. First, I find that changes in GAAP affect investment, particularly R&D expenditures, when firms have financial covenants that are affected by changes in GAAP. Second, I find evidence suggesting that the process of complying with some changes in GAAP alters managers’ information sets and consequently changes their investment decisions, particularly their capital and R&D expenditures and, to a weaker extent, their acquistion expenditures. This paper contributes to the literature on the real effects of accounting by providing evidence that accounting rules affect investment decisions even when the rule change does not concern the measurement and reporting of investment, and by documenting specific mechanisms through which the relation manifests.

Keywords: Investment; Capital expenditure; R&D; Acquisitions; GAAP; Managerial learning; Financial reporting; Earnings quality; Covenants; Financing constraints (search for similar items in EconPapers)
JEL-codes: D9 G30 G31 M40 M41 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (49)

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DOI: 10.1007/s11142-016-9375-x

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