Enforceable Accounting Rules and Income Measurement by Early 20th Century Railroads

Abstract

We investigate the extent to which income measurement by major early 20th century U.S. railroads shows evidence of reduced income smoothing and increased conservatism following new fixed asset accounting rules issued by the Interstate Commerce Commission (ICC) in 1907 and 1908 and concurrent rate regulation regime shifts. Accounting rules promulgated by the ICC after the Hepburn Act of 1906 are the first accounting rules in U.S. history where regulators could enforce such rules under federal law through penalties of fine and imprisonment to insure compliance. Our sample-wide results are more consistent with increased conservatism rather than income smoothing. Additional tests indicate these effects are more pronounced for firms subject to more intense rate regulation by the ICC, which suggests that the tie-in between accounting regulation and product/service market regulation influences the nature of economic effects associated with accounting regulation.