Discriminating Between Competing Hypotheses
Discriminating Between Competing Hypotheses
Discriminating Between Competing Hypotheses
Ball (1972)
Investigates all types of accounting changes Does not restrict his sample to changes that do not affect taxes He argues that under the no-effects hypothesis, accounting changes has no observable effects on the stock price at the time an accounting change is announced
A more powerful test using non zero stock price effect predictions
Changes in inventory methods because they affect taxes
Ricks (1982)
Attempts to control for the unexpected increase in earnings associated with LIFO switches
Economic Consequences
Economic consequences: a concept that asserts that, despite the implications of efficient securities market theory, accounting policy choice can affect firm value
Accounting Policy
Accounting policy any accounting policy, not just one that affects a firms cash flows
Economic Consequences & Efficient Market Theory Economic consequences the accounting policy will matter, despite the lack of cash flow effects Efficient market theory the change will not matter because future cash flows are not directly affected
Economic Consequences
Essentially, the notion of economic consequences is that firms accounting policies and changes in policies, matter
Matter to management But if matter to management, accounting policies matter to the investors
Economic Consequences
Accounting policy choice is part of the firms overall need to minimize its cost of capital and other contracting costs