Does Financial Reporting Matter? Evidence from Accounting Standards

• In Event: Securities Regulation - I

Abstract

We exploit firms’ voluntary disclosures as a novel firm-specific measure of ex ante sensitivity to individual FASB accounting standards to study the real effects of information regulation. We find that accounting standards impact capital allocation by increasing the cost and reducing the supply of credit and equity financing for sensitive firms. Affected firms respond by drawing down cash reserves and selling more assets compared to insensitive firms. Facing these financial constraints, affected firms cut payout by 2.6% and investment by 3.6%, on average. Our results suggest that accounting standards have economically significant real effects because they reallocate capital in financial markets.

Authors

• Andrew Bird, Carnegie Mellon University

• Aytekin Ertan, London Business School

• Stephen Adam Karolyi, Carnegie Mellon University

• Thomas Ruchti, Carnegie Mellon University