Do FASB's Standards Add Shareholder Value?

• In Event: Accounting Standards

Abstract

We examine the cost effectiveness, from the shareholders’ perspective, of 21 significant accounting standards passed by the FASB during 1973-2007. In particular, we evaluate (i) the stock market reactions of affected firms surrounding the events that changed the probability of the passage of these standards; and (ii) whether such reactions are related, in the cross-section, to affected firms’ agency problems, information asymmetry, contracting costs and estimation risk changes. Overall, there is little evidence of shareholder value creation for the FASB’s standard setting activities. The affected firms experience insignificant or negative stock returns on event dates related to the promulgation of 17 out of the 21 standards. Only four standards resulted in a statistically significant decrease in estimation risk of the affected firms. However, in the cross-section, market reactions around the event dates related to passage of these standards are higher for (i) firms that are opaque; or (ii) firms that enjoy a greater reduction in estimation risk.

Authors

• Urooj Khan, Columbia University

• Bin Li, The University of Texas at Dallas

• Shivaram Rajgopal, Emory University

• Mohan Venkatachalam, Duke University