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Capital Allocation and Timely Accounting Recognition of Economic Losses

Authors

  • Robert M. Bushman,

    1. The first author is from The University of North Carolina at Chapel Hill. The second author is from Stanford University Graduate School of Business. The third author is from The University of Chicago Booth School of Busin. They appreciate the comments of Ray Ball, Ryan Ball, Christian Leuz, Peter Pope (editor), Andrew Stark (editor), Martin Walker (editor), and seminar participants at the Chinese University of Hong Kong, Cornell University, New York University's Accounting Summer Camp, The Global Issues in Accounting Conference at UNC Chapel Hill, Wharton, the 2007 European Accounting Association Annual Meetings, and the 2005 Journal of Accounting Research / London Business School Conference on International Financial Reporting Standards. They also appreciate the financial support of the Kenan-Flagler Business School, University of North Carolina at Chapel Hill, the Graduate School of Business at Stanford University, the Booth School of Business at the University of Chicago, and the William Ladany Faculty Research Fund at the Booth School of Business, the University of Chicago.
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  • Joseph D. Piotroski,

    1. The first author is from The University of North Carolina at Chapel Hill. The second author is from Stanford University Graduate School of Business. The third author is from The University of Chicago Booth School of Busin. They appreciate the comments of Ray Ball, Ryan Ball, Christian Leuz, Peter Pope (editor), Andrew Stark (editor), Martin Walker (editor), and seminar participants at the Chinese University of Hong Kong, Cornell University, New York University's Accounting Summer Camp, The Global Issues in Accounting Conference at UNC Chapel Hill, Wharton, the 2007 European Accounting Association Annual Meetings, and the 2005 Journal of Accounting Research / London Business School Conference on International Financial Reporting Standards. They also appreciate the financial support of the Kenan-Flagler Business School, University of North Carolina at Chapel Hill, the Graduate School of Business at Stanford University, the Booth School of Business at the University of Chicago, and the William Ladany Faculty Research Fund at the Booth School of Business, the University of Chicago.
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  • Abbie J. Smith

    Corresponding author
    1. The first author is from The University of North Carolina at Chapel Hill. The second author is from Stanford University Graduate School of Business. The third author is from The University of Chicago Booth School of Busin. They appreciate the comments of Ray Ball, Ryan Ball, Christian Leuz, Peter Pope (editor), Andrew Stark (editor), Martin Walker (editor), and seminar participants at the Chinese University of Hong Kong, Cornell University, New York University's Accounting Summer Camp, The Global Issues in Accounting Conference at UNC Chapel Hill, Wharton, the 2007 European Accounting Association Annual Meetings, and the 2005 Journal of Accounting Research / London Business School Conference on International Financial Reporting Standards. They also appreciate the financial support of the Kenan-Flagler Business School, University of North Carolina at Chapel Hill, the Graduate School of Business at Stanford University, the Booth School of Business at the University of Chicago, and the William Ladany Faculty Research Fund at the Booth School of Business, the University of Chicago.
    Search for more papers by this author

Address for correspondence: Robert M. Bushman, The University of North Carolina at Chapel Hill, Kenan-Flagler Business School, Chapel Hill, North Carolina 27599, USA.
email: bushman@unc.edu

Abstract

Abstract:  This paper explores direct relations between corporate investment behavior and the timeliness of accounting recognition of economic losses (TLR) reflected in a country's accounting regime. We explicitly investigate the extent to which TLR influences investment decisions of firm managers. Given the asymmetric emphasis on negative outcomes inherent in TLR, we hypothesize that TLR will most strongly influence investment behavior when managers face deteriorating investment environments. We conjecture that TLR will have an asymmetric impact on investment behavior whereby TLR impacts firms’ investment decisions in the face of declining investment opportunities, but not in the face of increasing in investment opportunities. Using firm-level investment decisions spanning twenty five countries, we find that investment responses to declining opportunities increases with TLR, while we find no evidence that TLR influences the sensitivity of investment to increasing investment opportunities. Our results are robust to alternative estimates of TLR, alternative estimates of investment responses to changing investment opportunities, and to controls for important country-level, industry-level, and firm-level variables that may impact firms’ investment decisions.

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