You Don’t Know What You Don’t Know: Improvements in Investment Efficiency Prior to a Mandated Accounting Change

57 Pages Posted: 13 Apr 2021 Last revised: 22 Apr 2021

See all articles by Derek Christensen

Derek Christensen

University of Wisconsin - Madison - Department of Accounting and Information Systems

Dan Lynch

University of Wisconsin - Madison - Department of Accounting and Information Systems

Clay Partridge

University of California, Davis - Graduate School of Management

Date Written: April 12, 2021

Abstract

Theory suggests mandated changes in accounting standards can lead to increases in investment efficiency through two mechanisms: (1) increases in internal information quality (IIQ), or (2) reductions in information asymmetry with external parties. We use the long transition period of the new lease accounting standard to isolate the effects of increases in IIQ on investment efficiency. Using a difference-in-differences design we find that firms affected by the new lease standard experience significant increases in investment efficiency in the year immediately preceding the standards implementation. The improvements in investment efficiency are largest for firms with high lease intensity and multiple operating segments. The increases in investment efficiency are driven by over-investing firms that reduce their capital expenditures and net acquisitions. We contribute to the investment efficiency literature by identifying the effect of IIQ on investment behavior. Further, we document that internal information gathering in anticipation of a new accounting standard can improve managerial decision-making, an explicit goal of the FASB’s post-implementation review of the lease standard.

Keywords: investment efficiency, internal information quality, financial reporting, leases

JEL Classification: M41, G31, D83

Suggested Citation

Christensen, Derek and Lynch, Dan and Partridge, Clay, You Don’t Know What You Don’t Know: Improvements in Investment Efficiency Prior to a Mandated Accounting Change (April 12, 2021). Available at SSRN: https://ssrn.com/abstract=3825083 or http://dx.doi.org/10.2139/ssrn.3825083

Derek Christensen

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

975 University Ave
Madison, WI 53706
United States

Dan Lynch (Contact Author)

University of Wisconsin - Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

Clay Partridge

University of California, Davis - Graduate School of Management ( email )

One Shields Avenue
Davis, CA 95616
United States

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