198 JEFFERY ABARBANELL race between capital expenditures and depreciation in this study, however, lacks theoretical or empirical foundation, which somewhat limits its appeal from a research perspective. One reason for comparing the value relevance of depreciation and capital expenditures is to assess the possibility that investors functionally ﬁxate on one accounting measure and ignore information in another. However, the methodological approach adopted in the paper assumes that market prices are efﬁcient. This, in turn, presupposes that investors do not run horse races between readily observable variables that potentially contain orthogonal infor- mation. Furthermore, because adjusted earnings is not a common performance evaluation measure, the motivation for a horse race when prices are efﬁcient is not easily ﬁnessed with an appeal to contracting theory (see, for instance, Dechow, 1994). Another possible reason for comparing the informativeness of depreciation and capital expenditures is to provide indirect support for altering the accounting treatment of certain items under current GAAP rules. However, it would seem that an argument for or against allowing accounting discretion should be made on a case by case basis, using more di- rect testing methods than those employed here (see Lev and Sougiannis, (1996), which examines whether stock prices
Review of Accounting Studies – Springer Journals
Published: Sep 30, 2004
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