Depreciation-policy changes: tax, earnings management, and investment opportunity incentives

Depreciation-policy changes: tax, earnings management, and investment opportunity incentives Contrary to previous studies, we find managers change depreciation policies in predictable ways. We identify three dimensions of depreciation-policy changes: whether it is a method change or an estimate revision; whether it is income-increasing or decreasing; and whether it applies to new assets only or both new and existing assets. This disaggregation leads to three findings: First, a 1981 tax law altered the frequency of estimate revisions and method changes. Second, firms adopting income-increasing method changes for all assets experience worse performance than those adopting such changes only for new assets. Finally, non-income-increasing policy changes are associated with changes in investment opportunities. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting and Economics Elsevier

Depreciation-policy changes: tax, earnings management, and investment opportunity incentives

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Publisher
Elsevier
Copyright
Copyright © 2000 Elsevier Science B.V.
ISSN
0165-4101
D.O.I.
10.1016/S0165-4101(00)00004-5
Publisher site
See Article on Publisher Site

Abstract

Contrary to previous studies, we find managers change depreciation policies in predictable ways. We identify three dimensions of depreciation-policy changes: whether it is a method change or an estimate revision; whether it is income-increasing or decreasing; and whether it applies to new assets only or both new and existing assets. This disaggregation leads to three findings: First, a 1981 tax law altered the frequency of estimate revisions and method changes. Second, firms adopting income-increasing method changes for all assets experience worse performance than those adopting such changes only for new assets. Finally, non-income-increasing policy changes are associated with changes in investment opportunities.

Journal

Journal of Accounting and EconomicsElsevier

Published: Dec 1, 1999

References

  • Detecting abnormal operating performance: the empirical power and specification of test statistics
    Barber, B.; Lyon, J.
  • Debt and the marginal tax rate
    Graham, J.
  • Proxies for the corporate marginal tax rate
    Graham, J.

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