The article develops a theoretical framework that explains firms' reactions to accounting standards developed by the U.S. Financial Accounting Standards Board under its extended adoption policy. The proposed theory highlights the differences between recognized and disclosed accounting information and provides a link between a firm's choice of whether to recognize or disclose information under new accounting standards, and stock price behavior around the adoption announcement. Managers use the extended adoption period to convey to the market their private information about the new standard's financial impact. Furthermore, managers and the market distinguish between recognition and disclosure and do not view them as equivalent methods of information release. Hence, the choice of the reporting method is informative. Having analyzed alternative adoption policies, it has been found that as more reporting options are introduced, the number of firms that find it beneficial to renegotiate the underlying contract decreases. Managers can find alternative ways of communicating with the market. Having started with a benchmark case where managers' information is public, it has been found that firms renegotiate the obligation if renegotiation costs are sufficiently low.
Amir, Eli, and Amir Ziv. "Economic Consequences of Alternative Adoption Rules for New Accounting Standards." Contemporary Accounting Research 14, no. 3 (1997): 543-68.
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