An analysis of firms impacted by FASB interpretation of No. 46R - Consolidation of variable interest entities

This study investigates firms impacted by FASB Interpretation No. (FIN) 46R -- the consolidation of variable interest entities. A comparison is performed between firms who disclose an impact from a FIN 46R action to firms who have no disclosure of a FIN 46R action. This comparison allows me to analyze the firms in relation to certain firm characteristics (agency cost proxies, board characteristics and managerial ownership) and to also perform a market reaction study. Through an extensive data collection process, firm's information was collected from their 10Q and 10K SEC filings to extract firm-specific information on FIN 46R expected and actual adoption. The first part of the analysis investigates management's decision to disclose information on FIN 46R. The disclosure/action firms are found to be positively associated with firm size, financial leverage and the high probability attribute set by early disclosure information. Firm size and financial leverage captures the agency cost incentives in place that encourage managers to provide information to the market about firm risk. This paper also investigates market reactions to FIN46R information. The analysis finds significant market reactions to FASB News events occurring prior to firm's adoption of FIN 46R; however, the results show insignificant market reactions to firm-specific information on their impact or expected impact from the adoption of FIN 46R.