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Corporate investment and changes in GAAP

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  • Nemit Shroff

    (Massachusetts Institute of Technology)

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.

Suggested Citation

  • Nemit Shroff, 2017. "Corporate investment and changes in GAAP," Review of Accounting Studies, Springer, vol. 22(1), pages 1-63, March.
    • Handle: RePEc:spr:reaccs:v:22:y:2017:i:1:d:10.1007_s11142-016-9375-x
    DOI: 10.1007/s11142-016-9375-x
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    More about this item

    Keywords

    Investment; Capital expenditure; R&D; Acquisitions; GAAP; Managerial learning; Financial reporting; Earnings quality; Covenants; Financing constraints;
    All these keywords.

    JEL classification:

    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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