Anticipatory and Implementation Effects of FIN 46 on the Behavior of Different Market Participants

We examine whether FASB-mandated modifications of the consolidation rules (FIN 46 and FIN 46R) resulted in perceptible changes in market participants' decisions as manifested in a variety of financial indicia. We find that financial analysts' idiosyncratic precision of information decreased and equity market participants acted as if they perceived higher information risk, as evidenced by reduced earnings response coefficients, in anticipation of the guidance. We attribute these effects to a perceived increase in information risk and decrease in accounting information quality. We find that the actual implementation of the new rules reversed some of these effects. On the other hand, we find that information users that likely had access to information regarding the off-balance-sheet debt structures prior to 2001 did not exhibit a similar reaction to the apparent change in information risk either in anticipation or upon implementation of the new guidance. Specifically, we find that banks did not increase the loan spreads for FIN 46 firms and credit rating agencies lowered the ratings of these firms only marginally more than those of other firms. This finding is consistent with our conjecture that these entities were aware of the fundamentals of FIN 46 firms even under the prior limited disclosure regime. Overall, we conclude that the perceived information risk of firms that have previously structured a part of their operations in separate entities increased significantly with the expected promulgation of accounting guidance requiring them to bring in the previously off-balance-sheet assets, liabilities and results of operations into their financial statements. We interpret these results as evidence that these firms previously were assessed as having lower information risk relative to their peers within the equity market