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The valuation consequences of voluntary accounting changes

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  • James Linck

    ()

  • Thomas Lopez

    ()

  • Lynn Rees

    ()

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 [Sloan, R. G. (1996). The Accounting Review, 71, 289–315]. 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. Copyright Springer Science+Business Media, LLC 2007

Suggested Citation

  • James Linck & Thomas Lopez & Lynn Rees, 2007. "The valuation consequences of voluntary accounting changes," Review of Quantitative Finance and Accounting, Springer, vol. 28(4), pages 327-352, May.
  • Handle: RePEc:kap:rqfnac:v:28:y:2007:i:4:p:327-352
    DOI: 10.1007/s11156-007-0016-0
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    References listed on IDEAS

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    1. repec:eee:joacli:v:39:y:2017:i:c:p:52-81 is not listed on IDEAS

    More about this item

    Keywords

    Accounting changes; Accruals anomaly; Market efficiency; Earnings management; Earnings fixation; Earnings informativeness; Earnings quality; G14; M41;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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