[This paper investigates the reporting and contracting responses of electric utilities to SFAS No. 106. Expense-increasing accounting standards generally have no direct cash flow consequences for nonregulated firms, but they reduce these firms' reported net income and increase their reported liabilities. Past research documents that managers of nonregulated firms seek to avert potential contracting costs associated with such mandated accounting changes through operating, financing or reporting decisions that mitigate the financial statement impact of the accounting change. In contrast, expense-increasing accounting standards do not usually affect rate-regulated firms' net income, but do have a positive effect on their cash flows because the rate recovery mechanism is based on accounting numbers. Managers of rate-regulated firms therefore have incentives to respond to expense-increasing accounting standards in ways that enhance the financial statement impact of the accounting change. This study documents that managers of rate-regulated firms that face greater uncertainties about future rate recoveries have greater incentives to use discretionary choices that intensify the impact of expense-increasing accounting changes on current financial statements.]

This paper investigates the reporting and contracting responses of electric utilities to SFAS No. 106. Expense-increasing accounting standards generally have no direct cash flow consequences for nonregulated firms, but they reduce these firms' reported net income and increase their reported liabilities. Past research documents that managers of nonregulated firms seek to avert potential contracting costs associated with such mandated accounting changes through operating, financing or reporting decisions that mitigate the financial statement impact of the accounting change. In contrast, expense- increasing accounting standards do not usually affect rate-regulated firms' net income, but do have a positive effect on their cash flows because the rate recovery mechanism is based on accounting numbers. Managers of rate- regulated firms therefore have incentives to respond to expense-increasing accounting standards in ways that enhance the financial statement impact of the accounting change. This study documents that managers of rate-regulated firms that face greater uncertainties about future rate recoveries have greater incentives to use discretionary choices that intensify the impact of expense- increasing accounting changes on current financial statements.

Theory suggests that voluntary disclosure decisions are a function of conflicting incentives vis-a`-vis multiple audiences. However, few opportunities exist to investigate this issue empirically. We identify a setting that offers us such an opportunity: the electric utility industry as it transitions toward deregulation. We consider two types of voluntary disclosures: strategies to protect the firm's existing customer base and plans to exploit emerging opportunities under deregulation. We examine these particular disclosures since they are voluntary, relevant to all sample firms, and convey positive information about the firm's prospects in a deregulated environment. We consider three target audiences: industry regulators, capital market participants, and product market competitors. We find that our disclosure index is negatively associated with the magnitude of utilities' stranded costs in jurisdictions where the stranded cost recovery issue is unresolved, consistent with our predicted regulatory incentives. Further, our evidence indicates that capital market-related incentives are positively associated with our disclosure index. Finally, we find that product market-related incentives play a deterrent role in disclosure, but only after regulatory concerns have been resolved.

This study examines the interdependence between institutional ownership and the speed with which Standard & Poor's disseminates corporate accounting information. From the demand-side perspective, we find that quasi-indexers, who rely on corporate accounting information as a low-cost monitoring system, are the key driver of the institutional demand for speedy information dissemination. In addition, dissemination speed increases substantially for stocks listed in major market indices but decreases with high arbitrage risk or transaction costs. From the consequences perspective, we find that both transient investors and quasi-indexers gravitate to stocks with faster information dissemination, consistent with the latter using accounting information as a low-cost performance-monitoring mechanism, and the former being better enabled to implement their trading strategies in a richer information environment. Overall, this study provides new insights into the capital market information infrastructure by examining how information intermediaries and sophisticated investors impact each others' resource allocation decisions.