Addresses the issue of self-selection bias in the analysis of economic consequences of mandatory accounting changes. Use of the case of Statement of Financial Accounting Standard (SFAS) No. 2 to illustrate the effects of selection bias on studying the economic consequences of accounting regulation; Result of the switching regression analysis; Sources of selection bias.

[This study addresses the issue of self-selection bias in the analysis of economic consequences of mandatory accounting changes. Self-selection bias arises from the use of truncated, nonrandom samples to assess the behavior of firms using different accounting methods at the time of the mandated change. Using ordinary least squares (OLS) to estimate regression models containing data generated by self-selected firms can yield inconsistent and inefficient estimates of regression parameters. The present study uses the case of SFAS No. 2, promulgated in 1974, to illustrate the effects of selection bias on studying the economic consequences of accounting regulation. The estimation method used to correct for self-selectivity is a two-stage switching regression procedure developed by Heckman (1976, 1979) and Lee (1976, 1978). Employing this research method requires developing a complete model that explains the accounting choice decision and R&D investment decision. The switching regression model is estimated with data from 1973 to correct for self-selection bias and to predict the likely economic consequences of SFAS No. 2 prior to its adoption. The unbiased estimates of the R&D equations are then used with the Wald test to examine structural changes in the R&D model after the implementation of SFAS No. 2. To examine the sensitivity of the results to self-selection bias, the analysis is replicated with OLS estimates. The results of the switching regression analysis indicate that selection bias exists in both the capitalizing and expensing groups. This bias is further shown in systematic differences between the results of OLS and switching regression estimates. The OLS estimates consistently understate the predicted values of R&D expenditures for both groups and appear to understate the negative impact of SFAS No. 2 on the capitalizers' R&D expenditures. The results of the Wald test show that observed changes in the capitalizers' R&D spending behavior after 1974 are attributable, at least in part, to general macroeconomic phenomena. However, after controlling for the effects of economywide changes, the analysis shows an incremental effect of SFAS No. 2 on the R&D expenditures of former capitalizers.]