Double counting of inflation: An empirical test

Abstract

Scope of Study: It is hypothesized that, in periods of inflation, managers may inject an adjustment for inflation into reported historical cost earnings numbers. When these numbers are restated in compliance with SFAS 33, a double counting of the effects of inflation results. Most information content studies of SFAS 33 mandated earnings numbers ignore this possibility. Tb the extent that managers do include an adjustment for inflation in reported historical cost earnings numbers, these extant studies may be biased against finding incremental information content in the SFAS 33 disclosures.

Findings and Conclusions: The first objective was to partition a sample of firms into adjuster and nonadjuster firms. Regression analysis indicated that some firm managers appear to inject an adjustment for inflation into reported historical cost earnings numbers.

The second objective was to determine if the bias present in previous research was sufficient to affect the results of that research. A replication of the Beaver and Landsman research (BL, 1983) indicated that the bias due to the presence of adjuster firms in the Beaver and Landsman sample did not appear to affect the results of that research.