Efficient and opportunistic choices of accounting procedures

It is difficult to determine whether managers make accounting choices to maximize firm value. Empirical tests often assume opportunism and usually reject the null hypothesis of no association between accounting choice and firm-specific variables such as leverage. A study measures the relative influences and opportunism in accounting choice by examining a non-random sample that maximizes the probability of finding opportunism. Opportunism is measured by comparing the frequency of choice of income-increasing procedures by takeover targets with the corresponding frequency of their surviving industry peers. The study finds that takeover targets select income-increasing depreciation, inventory, and investment tax credit accounting methods more frequently than their surviving industry peers in up to 11 years preceding the control action. It is concluded that some accounting opportunism exists in the takeover targets, but that efficiency is the more important explanation of accounting choice. However, while the frequency of opportunism is relatively small, the dollar effect on retained earnings of selecting an income-increasing method is large.