An Empirical Analysis of the Regulation of the Defense Contracting Industry: The Cost Accounting Standards Board

Abstract

This study addresses the shareholder wealth effects of mandated accounting changes by focusing on a set of changes with the potential to reduce directly firms' operating cashflows. The set of changes arose from the establishment of the Cost Accounting Standards Board (CASB) to promulgate uniform cost accounting standards for firms bidding for defense contracts. Because most large defense contracts are awarded on a cost-reimbursement basis, mandated changes in a firm's cost accounting system translate directly into changes in the firm's present value of future cashflows. The CASB was established primarily on the assumption that firms doing defense business with the United States government used their voluntarily selected cost accounting methods to support reimbursement of costs beyond what they actually incurred in their contract work. Presumably, the establishment of uniform cost accounting standards by the CASB would remove this potential to overstate costs for reimbursement (and thereby overstate the profit margins of contracts). Whether