Publication Type
Journal Article
Version
submittedVersion
Publication Date
3-2018
Abstract
Using the adoption of SFAS 142 as an exogenous shock, we examine the effect of changes in financial reporting on firms’ internal information environment. SFAS 142 removed goodwill amortization and required firms to perform a two-step impairment test. We argue that complying with SFAS 142 induces managers to acquire new information and, therefore, improves managers’ information sets. Interviews with executives and auditors confirm this argument. Using a difference-in-differences design, we find that firms affected by SFAS 142 (i.e., treatment firms) experience an improvement in management forecast accuracy in the post-SFAS 142 period compared with those not affected. The increase is smaller for treatment firms with stronger monitoring mechanisms in the pre-SFAS 142 period and greater for firms with a higher likelihood of goodwill impairment. We further find that treatment firms with improvements in management forecast accuracy have higher M&A quality, internal capital allocation efficiency, and performance in the post-SFAS142 period than other treatment firms. Overall, our findings indicate that changes in external financial reporting can lead to better corporate decisions via their impact on the internal information environment.
Keywords
Financial reporting changes, internal information environment, SFAS 142, management forecasts, goodwill
Discipline
Accounting | Corporate Finance
Research Areas
Corporate Reporting and Disclosure
Publication
Review of Accounting Studies
Volume
23
Issue
1
First Page
347
Last Page
383
ISSN
1380-6653
Identifier
10.1007/s11142-017-9437-8
Publisher
Springer Verlag (Germany)
Citation
CHENG, Qiang; CHO, Young Jun; and YANG, Holly I..
Financial reporting changes and internal information environment: Evidence from SFAS 142. (2018). Review of Accounting Studies. 23, (1), 347-383.
Available at: https://ink.library.smu.edu.sg/soa_research/1768
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1007/s11142-017-9437-8