ECONOMIC FACTORS AND CHOICE OF ACCOUNTING METHODS: SOME METHODOLOGICAL ISSUES AND EMPIRICAL TEST

This study focuses principally on methodology and is aimed basically at improving and enriching the models currently being used in research to explain how and why firms make accounting method decisions, and how the behavior of firms are affected by mandatory accounting standards.;The study is directed at that research which attempts to establish a linkage between firms' accounting method decisions and behaviors, and factors derived from agency theory. Although the linkage between the choice of accounting methods and agency theory-derived factors is principally the income effect of the accounting methods, accounting research has generally not explicitly worked this into current explanatory models. Instead it is usually assumed that accounting methods per se convey information about the impact of the policy decisions on the financial statements of firms. This study addresses the implications of this assumption and suggests a methodology for incorporating the income effect of accounting choices into models designed to explain firms' accounting method decisions.;Firms' accounting method decisions with respect to research and development outlays is used to operationalize the suggested improvement in current methodology. The relationship between the initial research and development accounting method decision of firms and the effect of that decision on reported earnings (as measured indirectly by the initial research intensity of the firm) was tested using the nonparametric Mann-Whitney tests. The significant results obtained in this test and in tests examining the relationship between research and development accounting method changes and impact of such changes on reported earnings, strongly support the position that earnings impact of accounting method decisions should be explicitly incorporated in explanatory models of firms' accounting method decisions.;The impact of the promulgation of Statement of Financial Accounting Standards (SFAS) 2--"Accounting for Research and Development Costs"--on the behavior of research firms was also addressed in this study. The objective of this inquiry was to determine whether the standard could be associated with unusual trends in the research activities of affected firms. The results seem to indicate that when past periods' research trends were taken into consideration, there did not seem to have been any impact of SFAS 2 on the level of research activity. Other tests also suggest that firms did not generally attempt to adapt to the income effect of SFAS 2 by making overt accounting method changes.