Economic consequences of mandated accounting disclosures

I examine whether firms alter their behavior in response to changes in accounting standards mandating new financial statement disclosures. It is debatable whether changes in accounting rules lead to changes in behavior. It is even less clear whether changes in accounting standards relating to disclosure---as opposed to recognition or measurement---can induce changes in firm behavior. I examine the economic consequences of the mandated disclosure of pension asset composition under SFAS 132R. I find that when asset composition is disclosed in financial statements for the first time under SFAS 132R, firms that were previously using upward biased expected rates of return (ERRs) on pension plan assets responded to the new standard by increasing asset allocation to equities and/or reducing ERRs. My finding that new disclosure requirements alone are enough to induce meaningful changes in firm behavior offers compelling evidence in support of the idea that firms alter their behavior in response to changes in accounting standards.