AAA Spark Meeting of Regions

You Don't Know What You Don't Know: Improvements in Investment Efficiency From a Mandated Accounting Change

• In Event: Incentives, Cost of Equity, Bank Management Guidance

Abstract

Theory suggests mandated changes in accounting standards can lead to increases in investment efficiency through two mechanisms: (1) increases in internal information quality (IIQ), or (2) reductions in information asymmetry with external parties. We use the long transition period of the new lease accounting standard to isolate the effects of increases in internal information quality on investment efficiency. Using a difference-in-differences design we find that firms most affected by the new lease standard experience significant increases in investment efficiency in the year immediately preceding the standards implementation. These increases in investment efficiency are driven by chronically over-investing firms that reduce their capital expenditures and net acquisitions. Our results suggest internal information gathering in anticipation of a new accounting standard can improve managerial decision making via increases in IIQ. Further, we contribute to the investment efficiency literature by identifying the effect of IIQ on investment behavior.

Authors

• Derek Christensen, University of Wisconsin

• Daniel Patrick Lynch, University of Wisconsin-Madison

• Clay Partridge, University of California - Davis