The Power of the Default: Investors’ Reactions to Default Amortization Periods and Deviations Therefrom

Abstract

As standard setters deliberate the accounting for intangibles, the idea of establishing a default useful life with an option to deviate could reduce the costs and complexities inherent in estimating the useful lives of these assets. Across multiple experiments, we investigate investors’ reactions to companies that utilize versus deviate from a default useful life set by standard setters. We find that investors believe (1) a mandated default life is more of an endorsement of that life than are deviations from it, and (2) companies that deviate will have more difficulty determining the useful life and will face increased scrutiny and justification demands. These insights generally hold whether the deviation results in a shorter or longer expected life, and they become more pronounced as the magnitude of deviation increases. Despite this finding, we observe that investors do not generally view a company’s useful life choice as informative about their true beliefs and judged future economic benefits of the intangible. Collectively, the results suggest that investors view deviations from a default as imposing costs on firms, but not conveying credible information about managers’ true beliefs regarding the economic benefits of the asset. Our findings are informative to standard setters and firm managers.