The Influence of Accounting Principles on Management Investment Decisions: An Illustration.

Abstract The article presents a study on the importance of the equity-accounting standard in making management investment decisions. According to the authors, managers, accountants, and standard setters should be aware of the potential for a real economic impact from standards made operational through incorporation of numerical thresholds. In concept, a decision-neutral standard should cause the investment decision to turn mainly on business and financial considerations. Since the equity-accounting standard appears to impact the size-of-holding dimension of investment decisions, it is not decision-neutral. This means that less firm value may be created than if the investment decision were made without the influence of the size-of-holding on the accounting treatment and hence reported profits. The findings lend support to the earlier results and indicate that the equity-accounting standard is playing an important role in the surveyed managements investment decisions. Rather than simply providing neutral guidance to managements in the reporting of investment results, the accounting standard is influencing investment behavior.