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Depreciation-policy changes: tax, earnings management, and investment opportunity incentives

Authors
Journal
Journal of Accounting and Economics
0165-4101
Publisher
Elsevier
Publication Date
Volume
28
Issue
3
Identifiers
DOI: 10.1016/s0165-4101(00)00004-5
Keywords
  • Contracting
  • Taxes
  • Depreciation
  • Policy Choice

Abstract

Abstract Contrary to previous studies, we find managers change depreciation policies in predictable ways. We identify three dimensions of depreciation-policy changes: whether it is a method change or an estimate revision; whether it is income-increasing or decreasing; and whether it applies to new assets only or both new and existing assets. This disaggregation leads to three findings: First, a 1981 tax law altered the frequency of estimate revisions and method changes. Second, firms adopting income-increasing method changes for all assets experience worse performance than those adopting such changes only for new assets. Finally, non-income-increasing policy changes are associated with changes in investment opportunities.

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