Stock Market Reaction to the Depreciation Switch-Back.

Abstract The aim of this article is to present the findings of an investigation of 69 firms that changed their depreciation accounting method from a form of accelerated depreciation to a form of straight-line depreciation for financial statement purposes. At the completion of the extensive datagathering required for this study it was believed that the 69 firms represented all the firms that made change in the intervening period and were indexed by the major reporting services cited above. Although a few potential switch-back firms have come to light since, it would not seem that their inclusion would significantly influence the study findings. The investigation of 65 switch-back firms during the period in which they decided to change their depreciation method offers some advantages for seeking out the existence of a market influence. The magnitude of the effect of the change on reported net income is significant. For the 60 profitable firms in the sample, the median increase in net income after taxes resulting from the change is 8.64 percent and the range runs from 1.00 percent to 26.8 percent.