The Market Reaction to Statement of Financial Accounting Standards No. 2.

Abstract ABSTRACT: SFAS No. 2, issued in October, 1974, required most firms to expense the costs of their R&D activities as incurred. Upon careful consideration of the accounting change imposed on firms previously following the deferral alternative, it is argued that a market reaction to the accounting change could be attributed to the effects of new information or to the effects of expected changes in management decisions. The tests in this study are designed to detect effects of the latter type. No significant market reaction to the imposition of SFAS No. 2 was observed. These results are consistent with the hypothesis that investors did not expect managements' decisions to change as a result of the new accounting method for R&D costs.