Voluntary Accounting Changes and Analyst Following

• In Event: Financial Accounting & Reporting # 4
  In Paper Session: Financial Accounting and Reporting # 4

Abstract

This study examines the relation between voluntary accounting changes (VACs) and analyst following. We argue that the task complexity would cost additional efforts for the analysts and affect analysts’ following decisions after VAC. To address our research question, we collect a sample of firms with voluntary accounting changes in the period from 1994 to 2008 and their major competitors as well as industry benchmarking firms without accounting changes. Task complexity is captured by the types of accounting changes and the accounting choice heterogeneity between the VAC firms and their industry peers. We then investigate how voluntary accounting changes would affect analysts’ following decisions given the types of accounting changes and how such association would be affected by accounting choice heterogeneity. Our findings demonstrate that valuation-related accounting changes are negatively associated with analyst following after VAC while presentation-related accounting changes are positively related to analyst following after VAC. Such association becomes larger after taking into account accounting choice heterogeneity before and after VAC. Our results suggest that different types of voluntary accounting changes would lead to different levels of costs for analysts when digesting and integrating financial reporting information. The level of costs would in turn affect analysts’ following decisions after voluntary accounting changes.

Authors

• Tawei Wang, University of Hawaii at Manoa

• JIA-LANG SENG, National Chengchi University

• TZU-LING HUANG, National Chengchi University