This study empirically investigates whether accounting for software development costs, required by the Financial Accounting Standards Board’s Statement No. 86 (SFAS No. 86), affects corporate earnings variability and earnings forecast errors. This research question is motivated by software firms’ growing opposition to the current accounting rule (SFAS No. 86) for software development costs. Their opposition was highlighted by the March 1996 petition of the Software Publishers Association (SPA) to the FASB seeking abolition of SFAS No. 86. As the only exception to the expensing-all rule for R&D expenditures, the Financial Accounting Standards Board (FASB) issued SFAS No. 86 in 1985.
The standard requires firms that develop software intended for external use to capitalize the later portion of development costs after technological feasibility is established. The firms then amortize these deferred costs proportionally against realized and expected future revenues. The capitalized costs are also required to be written down to net realizable value on a product-by product basis if the net realizable value is assessed at lower than the book value of the capitalized costs. Since software development costs are the primary operating expenditures of software companies (accounting for 18% of sales on average in my sample), either expensing or capitalizing them could have a dramatic impact on their financial statements. In general, capitalization could improve a company’s financial measures, leading to higher net income, higher return on equity (ROE), and higher retained earnings and assets (equal to accumulated capitalization of software costs).
Many financial disasters have been caused by derivatives, despite the recent introduction of those products in the 70s. The resounding case of Barings Bank in the early 90s, with a loss of $1bn after dubious trades on interest rates futures that led to the bankruptcy of this century-old bank, was the first warning of the danger of derivatives trading. A long list of similar disasters soon followed, and we just give a few of them. In 1998, Long Term Capital Management lost $4bn on somewhat similar products, resulting as well in bankruptcy of this business with the involvement of well-established personalities.
A cornerstone of the U.S. consumer credit markets is the personal bankruptcy law, which aims to provide a “fresh start” to distressed debtors through debt discharge. Amid the fast growth of consumer credit in the past two decades, the number of households that have sought bankruptcy protection has also increased dramatically in the United States, with the annual rate of personal bankruptcy filings rising from 3.6 filings per thousand households in 1980 to nearly 14 in 2004. Such a rapid rise has motivated an extensive literature searching for the causes of personal bankruptcy filing. Most of the existing literature, however, focuses squarely on the prepetition conditions and financial market evolutions and pays little attention to household financial conditions post bankruptcy. This is somewhat surprising because what happens to postbankruptcy borrowing should affect the filing decision in the first place. In addition, studying postbankruptcy financial well being is critical to evaluating the effectiveness of the law. Moreover, with little empirical evidence documented as guidance, the existing dynamic equilibrium models with bankruptcy features may not have been realistically calibrated.
In this paper, we seek to address this void by providing a comprehensive analysis on house hold borrowing after personal bankruptcy filing. Using data from the Survey of Consumer Finances (SCF), we examine the differences in the use of credit between those households who have ever filed for bankruptcy and those who have never filed, hereafter “filers” and “nonfilers”, respectively. In addition, we study how the effects of bankruptcy filing vary with time passed since the last filing, hereafter “time since filing”. Specifically, for each of the three major debt categories credit card debt, first lien home mortgages, and vehicle loans we try to answer the following questions: Is it less likely for filers to take on such debt than comparable nonfilers? Conditional on having the access, do filers borrow less or pay a higher interest rate? Are filers more likely to experience renewed debt payment difficulties? How do these effects change with the staleness and the removal of a bankruptcy record from credit reports?
