An empirical examination of security price reaction to discretionary adoption of SFAS 34

The broad latitude and flexibility of generally accepted accounting principles (GAAP) has received significant attention in recent years. The increasing frequency of reported accounting changes has raised the question of potential abuse by companies trying to exploit this flexibility by changing accounting principles in an effort to manage the pattern of their reported income. Some of these companies act as though they are able to mislead the readers of their financial statements. This view that investors take accounting data at face value and they they cannot completely distinguish between real economic events and simple differences in accounting methods has been labeled functional fixation.