Corporate investment and changes in GAAP

This paper investigates whether changes in Generally Accepted Accounting Principles (GAAP) affect corporate investment decisions. Using a sample containing forty nine changes in GAAP, I find that changes in accounting rules affect investment decisions. I then examine two mechanisms through which changes in GAAP affect investment. First, I find that changes in GAAP affect investment, particularly R&D expenditures, when firms have financial covenants that are affected by changes in GAAP. Second, I find evidence suggesting that the process of complying with some changes in GAAP alters managers’ information sets and consequently changes their investment decisions, particularly their capital and R&D expenditures and, to a weaker extent, their acquistion expenditures. This paper contributes to the literature on the real effects of accounting by providing evidence that accounting rules affect investment decisions even when the rule change does not concern the measurement and reporting of investment, and by documenting specific mechanisms through which the relation manifests.     

How Firms Make Capital Expenditure Decisions: Financial Signals, Internal Cash Flows, Income Taxes and the Tax Reform Act of 1986

This paper empirically assesses the determinants of future net capital expenditures for a broad cross-section of COMPUSTAT firms from 1973 to 1989. We explore three general categories of factors expected to affect investment: (1) external equity financing, (2) internally generated accounting information, and (3) tax incentives. We find that external financing and information plays a role in that both positive stock returns and equity issuances indicate future increases in investment. The results suggest that high stock prices not only lower the cost of capital, but also signal good investment opportunities. Accounting information about internal sources and uses of funds are also important in the investment decision. In particular, net income and depreciation are positive indicators of future investment while there is a tradeoff between the payment of dividends and investment. Further, positive changes in available cash liquidity also motivate future investment. While taxes are not important in the investment decision on average, we find that firms with previously higher income taxes invested substantially more in 1985 and 1986. This coincides with the repeal of the investment tax credit and the accelerated depreciation schedules in the Tax Reform Act of 1986. We view this as evidence that federal tax policy in the 1980's induced firms with high income tax obligations to accelerate capital expenditures just before the favorable tax treatment of capital expenditures was eliminated.     

The Relation Between Patent Citations and Tobin's Q in the Semiconductor Industry

The market value of a firm is largely determined by the expected returns to the firm's tangible and intangible assets. However, accounting data generally excludes intangible assets. Financial variables which are constructed in part from accounting data, such as Tobin's Q, are thus biased. If measures of intangible capital are successful in explaining variation in Q, then a case can be made for incorporating such measures into future research. In high technology industries, such as the semiconductor industry, valuing a firm's intangible assets requires the valuation of its technological capital. Past studies have relied heavily on simple patent counts and research and development expenditures to quantify the technological component of a firm's intangible assets. This paper examines the ability of measures of intangible capital to explain variation in Q and considers an additional data source, patent citations. We find that stock variables created from citation data contain relevant information about the market's valuation of intangible assets.     

The persistence of current and proposed measures of operating cash flow

The measurement of operating cash flow using U.S. generally accepted accounting principles (GAAP) currently requires deductions for interest and income tax payments, and prohibits deductions for capital expenditures. In contrast, the IASB and the FASB are jointly proposing a new measure of operating cash flow which prohibits deductions for interest and income tax payments, and requires deductions for capital expenditures. This study compares the persistence of the current and proposed measures of operating cash flow, and the industry-specific results indicate that there is no significant difference between the persistence of the two measures for more than three-fourths of the industries in the sample. Moreover, the Boards’ constituents are recommending the use of a subtotal of operating cash flow prior to capital expenditures, and the results of this study suggest that this subtotal is more persistent for a limited number of industries than the current measure. Overall, the results of this study suggest that the predictive ability of operating cash flow will not change significantly for most industries.     

Accounting for Intangible Investments

The traditional categorisation of expenditures evident in many firms' charts of accounts and financial statements does not identify and measure expenditures on intangible investment separately from tangible investment and operating expenditures. This contrasts with the accounting for tangible investment, which separately accounts for all expenditures as assets unless the future benefits are consumed in a single accounting period. Further, in searching for better ways to account for intangibles, regulators and researchers have focused on the accounting choice problem relating to the existence and recognisability of intangible assets. In this paper, we argue that identifying and separately reporting the expenditures on intangible investment is the logical first step in accounting for intangible investments. Learning about the firm's categories of value driving (and sometimes potentially value destroying) expenditures has important implications for understanding aspects of the value chain, performance measurement, valuation, corporate governance and the external audit.     

IPO anomalies and innovation capital

Innovation capital are typically expensed and/or unrecognized as assets under current generally accepted accounting principles. This results in accounting-related information asymmetry. This paper examines the association of innovation capital (as measured here by the proxies of R&D expenditures and granted patents) and initial public offerings (IPO) anomalies. These anomalies include initial IPO underpricing, duration of honeymoon (a distinct feature of the Taiwanese IPO environment), and long-term performance. The theoretical model underlying this research is a signaling model. The results indicate that more innovative firms are more likely to be underpriced, and have longer honeymoon periods than less innovative firms. Further, the more innovative firms have positive and growing long-term market-adjusted returns. This stands in contrast to the declining long-term stock performance of initial public offering firms that is evidenced in the literature. We conclude that pre-IPO research and development expenditures disclosed in the IPO prospectus, official monthly reports of newly developed patents released to the public, and the frequency of patent citations significantly signal both underpricing and future market performance of IPO firms in Taiwan.     

Measuring Compliance with the Golden Rule

The golden rule of public finance is based upon the notin that intergenerational equity requires that the cost of public expenditures be spread over time in a manner that reflects the intertemporal distribution of the benefits generated by those expenditures. This is often translated into a rule that the budget be structurally balanced in accrual accounting terms. This article considers the form of accrual accounting that is most suited to the task of measuring the consistency of fiscal policy with the golden rule. It recommends a combination of the real capital maintenance approach (also known as ‘current purchasing power accounting’) and annuity depreciation. Such an approach differs from ‘current cost accounting’, which has dominated public sector models of accrual accounting in recent years. The meaning of balance-sheet measures is also considered, and it is concluded that the golden rule is more appropriately expressed as an accrual balanced budget requirement than as a requirement for the maintenance of constant net worth. JEL classification: H6, M40.     

Fiscal incentives and political budget cycles in China

Political budget cycles in democracies have been extensively analyzed, but few studies of non-democracies exist. This paper explores political budget cycles in China’s provinces. Using data from Chinese provinces from 1980 to 2006, the analysis finds that the effects of a provincial leader’s tenure on political budget cycles are minimal, implying a weak causal relationship between spending composition and a politician’s time in office at the provincial level. However, there exists a national coordinated cycle associated with the timing of the National Congress of the Communist Party (NCCP). Two years prior to the NCCP, politicians are likely to shift public spending toward capital expenditures, such as innovation funds and capital construction, and away from current expenditures, such as agricultural subsidies. The opposite pattern occurs during the year of the NCCP, when politicians increase current expenditures, such as social expenditures and government administration, and decrease capital expenditures. The increased capital expenditures 2 years prior to the NCCP are accompanied by an increase in taxation and total aggregate spending. The empirical results indicate that provincial budget cycles are mainly driven by national policies rather than by provincial leaders’ personal career incentives. Chinese leaders’ fiscal behaviors are constrained by the dynamics of the national leadership transition, resulting in similar distortions to those found in the democratic countries.     

Corporate responsibility towards employees and innovation: Evidence from an emerging market

Against a background of rising labor costs and the need to build a harmonious labor–capital relationship in China, this paper focuses on non-pecuniary incentives for employees and discusses the impact of corporate social responsibility (CSR) towards employees on innovation performance. The empirical results show that CSR towards employees significantly promotes corporate innovation, and that this effect remains robust after accounting for alternative proxies and endogeneity issues. In addition, the positive effect of CSR towards employees on innovation is more significant for firms in high-tech industries, with high levels of R&D inputs and high valuation of employee collaboration. Further analysis indicates that CSR towards employees does not promote R&D investment, but does significantly improve innovation efficiency and the marginal output of R&D investment and reduces the turnover rate of management-level staff with production and R&D backgrounds, which is conducive to stability of the innovation team. In addition, this paper also finds that for companies with high R&D expenditures, CSR towards employees significantly eases the sensitivity between executive turnover and performance, which helps executives resist pressure arising from a decline in short-term performance. The findings of this paper have implications for improving labor–capital relations and enhancing firm innovation capabilities.     

The impact of implied facilities cost of money subsidies on capital expenditures and the cost of debt in the defense industry

We examine the public policy effects of a cash flow subsidy unique to the government contracting industry, on defense contractors’ capital expenditures and cost of debt over a relatively long time-period, 1978–2009. Because the Department of Defense found evidence of a shrinking defense industrial base in the early 1970s, it wanted to encourage capital spending by defense firms. The result was a cost accounting standard that reimbursed contractors for an imputed facilities capital cost of money (FCCOM) that has remained in effect, virtually unchanged, for almost 30 years, despite structural changes in the defense industry. Our results, using a sample of 628 defense firms, suggest that the standard met its intended objective of increased capital spending within 10 years of its promulgation. However, we also find that the FCCOM subsidy may have contributed to a decreased cost of debt within the defense sector over the long-term. Finally, further analyses indicate that the long-term persistence of this subsidy may have encouraged defense contractors to overinvest in capital goods. Our findings suggest that public policy makers should consider both direct and indirect effects of regulation embedded in accounting standards.     

R&D investments,capital expenditures,and earnings thresholds

Prior studies find that firms cut research and development (R&D) expense in response to earnings considerations. We extend this stream of research by documenting that firms narrowly achieving an earnings threshold also report unusually high capital expenditures. In addition, these firms’ total investments (R&D expense plus capital expenditures) do not vary in response to earnings thresholds, which suggests that, on average, reductions in R&D expense are offset by concurrent increases in capital expenditures. Lastly, our research design allows us to infer that the increased capital expenditures are largely R&D investments that are capitalized instead of non-R&D capital expenditures, suggesting that overall investments in R&D are relatively unchanged.     

Review and extension of Bhattacharyya's Modern Accounting Concepts in Kautilya's Arthasastra

This is a discussion of the theoretical aspects of accounting as they emerged in India during the Maurya period (c.321 BC to c.184 BC) in Kautilya's Arthasastra (c.300 BC) - the very first known treatise to deal with accounting aspects in the history of our discipline. Pertinent evidence can be found in an article by Choudhury (1982) and in Bhattacharyya's (1988) book, Modern Accounting Concepts in Kautilya's Arthasastra. This book, hardly known in Western accounting circles, claims that Kautilya's ancient treatise anticipated a series of 'modern' accounting concepts. These claims are here examined on the basis of the two standard translations of the Arthasastra, the original one by Shamasastry ([1915] 1967) and an extended one by Kangle (1963). Apart from some background material, the focus of this paper is on three aspects: (1) Kautilya's various types of income (including aspects of accounting for price changes, the distinction between real and fictitious holding gains, etc.) and their possible relation to modern concepts; (2) his classification of expenditures or costs (including possibly fixed vs variable costs); and (3) his notions of capital. These aspects indicate a surprisingly long-standing need for and possible use of relatively sophisticated accounting concepts. Thus Choudhury and, particularly, Battacharyya must be praised for drawing the attention of Western accountants to different aspects of an important ancient treatise. Yet Bhattacharyya (1988) deserves to be critically investigated and interpreted, not only from a Western point of view but also from the perspective of modern price-level accounting.     

Access to capital,investment, and the financial crisis

During the recent financial crisis, corporate borrowing and capital expenditures fall sharply. Most existing research links the two phenomena by arguing that a shock to bank lending (or, more generally, to the corporate credit supply) caused a reduction in capital expenditures. The economic significance of this causal link is tenuous, as we find that (1) bank-dependent firms do not decrease capital expenditures more than matching firms in the first year of the crisis or in the two quarters after Lehman Brother's bankruptcy; (2) firms that are unlevered before the crisis decrease capital expenditures during the crisis as much as matching firms and, proportionately, more than highly levered firms; (3) the decrease in net debt issuance for bank-dependent firms is not greater than for matching firms; (4) the average cumulative decrease in net equity issuance is more than twice the average decrease in net debt issuance from the start of the crisis through March 2009; and (5) bank-dependent firms hoard cash during the crisis compared with unlevered firms.     

Accounting Measurement and Capital Markets Research

Numerous controversies — from goodwill amortisation to the appropriateness of fair value accounting — illustrate both the importance of measurement questions, and the difficulty often encountered in devising accounting measurement "solutions" that are widely accepted. This paper discusses what might be learned about accounting measurement questions from the perspective of capital markets-based research. While this field of inquiry is not well developed, there are indications that further research from the capital markets perspective could provide useful conclusions about accounting measurement.     

共同治理逻辑下的人力资本会计研究

企业理论从“股东至上”演进到“共同治理”,客观需要人力资源会计的发展。尽管目前开始的人力资本产权会计研究把人力资本纳入了企业的权益资本,但并没有反映出人力资本会计核算与“共同治理”理论的内在逻辑一致性。本文指出了人力资本会计设计与核算需要体现的人力资本与物力资本“共同治理”的特征,分析讨论了人力资本的价值运动,提出了股权人力资本与非股权人力资本的会计核算模式,并就相应的会计报告进行了探讨。     

Government financing decisions and asset returns

This paper presents an empirical investigation of the relation between government financing decisions and asset returns. In particular, the focus is on whether a substitution of debt financing for tax financing of a given level of expenditures is associated with an increase in interest rates. The paper brings a different perspective to empirical investigations of government fiscal policies by examining the response of asset prices in an efficient capital market to such policies rather than focusing on aggregate consumption behavior. The results are consistent with the idea that asset prices are unrelated to how the government finances its expenditures. The results, however, also indicate that the capital market is not indifferent with respect to the level of government expenditures as higher interest rates are associated with increases in government purchases.     

Evidence on the Usefulness of Capital Expenditures as an Alternative Measure of Depreciation

Investment professionals often suggest that accounting earnings is a more useful indicator of share value if adjusted by substituting current capital expenditures for reported depreciation. We investigate the usefulness of this alternative depreciation measure by comparing the ability of reported earnings and adjusted earnings to explain the cross-sectional distribution of stock prices for a large sample of manufacturing firms. We find that adjusted earnings explains a much smaller fraction of the variation in share prices than earnings based on reported depreciation, and provide evidence on the reasons for this difference.     

Incentive effects of bonus depreciation

This study examines the effect on capital expenditures of “bonus depreciation,” which was intended to stimulate such spending by allowing businesses to immediately expense a portion of the cost of qualified capital expenditures from late 2001 through 2004. After controlling for many previously documented determinants of capital expenditures, some of our results indicate that capital expenditures during bonus depreciation’s availability were greater than those during the time it was not available, consistent with the expected effect. However, other results indicate that bonus depreciation had an insignificant effect on capital expenditures. These mixed findings generally persist through several sensitivity analyses. We interpret these results as weakly supportive evidence that Congress attained its goal of stimulating capital spending.     

Return on investment and corporate capital expenditures: Empirical evidence

It is well known (e.g., Gordon 1996, Chapter 8) that maximizing a firm's ROI is not equivalent to maximizing the value of the firm. This fact notwithstanding, it is often claimed that many managers use ROI in making capital expenditure decisions. The purpose of our paper is to empirically examine this claim. The primary findings presented in this paper offer substantial evidence demonstrating the positive association between ROI and capital expenditures. The positive association between ROI and capital expenditures occurs even where the interests of owners and managers are apparently in conflict.     

Corporate capital expenditure decisions and the market value of the firm

This paper is an ‘event-time’ study of the common stock prices of a sample of 658 corporations around the dates on which they publicly announced their future capital expenditure plans. For industrial firms, announcements of increases (decreases) in planned capital expenditures are associated with significant positive (negative) excess stock returns. For public utility firm, neither increases nor decreases in planned capital expenditures are associated with significant excess stock returns. We interpret the evidence as being consistent with the hypothesis that managers seek to maximize the market value of the firm in making their corporate capital expenditure decisions.