The Impact of Standard Setting on Individual Investors: Evidence From SFAS 109

This study uses data on the stock holdings of individual investors to examine how they respond to a change in accounting standards. We examine the response of individual investors to firms’ adoptions of FASB Standard 109 (Accounting for Income Taxes), which made significant modifications to the accounting for and reporting of income taxes. We evaluate the extent to which these modifications provided additional decision-useful information to individual investors, thereby lowering the information disadvantage of individual investors relative to more sophisticated investors. Using the staggered adoption of SFAS 109, we predict and find evidence that individual investors increase their holdings in firms more effected by the adoption of SFAS 109. We find that the increase in holdings is concentrated among less sophisticated individual investors. Additionally, we observe an increase in holdings of firms with an immaterial adjustment to retained earnings upon adoption, suggesting our results are a function of an increase in information provided to investors and not driven by heuristic trading strategies (i.e., book-to-market ratio). Collectively, our results are consistent with SFAS 109 providing additional decision-useful information to individual investors, reducing their information disadvantage relative to other investors. Recently, there have been criticisms of the costs of FASB accounting standards relative to their benefits. We add to this debate by evaluating how one FASB standard affects the flow of information to individual investors.