The Stock Price Impact of Mandated Accounting Charges on Rate-Regulated Firms

This study seeks to determine ifmore highly leveraged rate-regulated firms are positively affectedby accounting standards that increase recognized expenses. Itfinds a positive relation between leverage and market reactionsto SFAS 106 for rate-regulated firms. Further, results indicatethat this positive relation is an increasing function of thelevel of financial leverage and the extent to which the regulatoryclimate is favorable.The study makes severalcontributions to the accounting literature. It documents thatfor rate-regulated firms, the relation between financial leverageand the market impact of an accounting standard that increasesrecognized expenses is contrary to that documented for the generalpopulation of firms. It identifies factors that affect the strengthof the positive relation between financial leverage and rate-regulatedfirms' price reactions to accounting standards that increaserecognized expenses. It also has potential implications for futureresearch on the incremental informativeness of cash flows becauseit helps to identify settings in which cash flow informationis likely to be particularly important.