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An International Meeting of American Accounting
Association
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Capital Allocation and Timely Accounting Recognition of Economic Losses |
Robert M. Bushman
University of North Carolina
Joseph D Piotroski
University of Chicago
Abbie J Smith
University of Chicago
Abstract: We investigate the relation between firm's investment decision and timely accounting recognition of economic losses (TLR). We build on extant theory which predicts taht TLR curbs over-investment by managers faced with declining investment opportunities. We test whether managers in countries with relatively high TLR reduce investment spending more in reponse to a decline ini investment opportunities than managers in countries with low TLR. We introduce TLR into a regression model based on Q-theory of optimal investment, extended to allow for differential investment responsses to increasing versus decreasing investment opportunities. Using firm-level investment decisions spanning twenty-five countries, we find that the total and incremental investment response to declining opportunities increases with TLR. Our results are robust to alternative estimates of TLR, alternative estimates of investment responses, and to controls for country-level, industy-level and firm-level variables.