The SEC "Reversal" of FASB Statement No. 19: An Investigation of Information Effects

Abstract

It has become popular in recent years to assess the economic consequences of new financial reporting standards and disclosure requirements as reflected in stock price behavior. While the motivation for such studies seems to be generally accepted, there are serious problems both in designing studies to assess the capital market reaction to new accounting rules, and in subsequently interpreting the results for policymaking. The difficulties are largely due to the lack of tight models of how new Financial Accounting Standards Board (FASB) standards and Securities and Exchange Commission (SEC) releases should impact investor decisions within the context of efficient markets. This generally leads the researchers to test for average abnormal stock returns upon the announcement of a new accounting rule across a sample of firms subject to the rule. This empirical approach is exposed to two major dangers. First, the intrusion of confounding events can easily lead to rejection of the null hypothesis of no price response due to both the very general nature of the alternate hypothesis of average abnormal returns and the single event date.'