The impact of standard setting on individual investors: evidence from SFAS 109

We examine the response of individual investors to firms’ adoptions of SFAS 109 – Accounting for Income Taxes. We predict that SFAS 109 reduces disclosure-processing costs and provides new decision-useful information, reducing the information disadvantage of individual investors relative to more sophisticated investors. Using monthly individual investor stock holdings data and staggered firm adoptions of SFAS 109, we provide evidence that individual investors increased their holdings in firms following adoption of SFAS 109. The increases are concentrated among more financially knowledgeable individual investors and among individual investors that are more likely to trade on financial statement information. We provide evidence that the increased demand among individual investors following SFAS 109 adoption is concentrated in firms with (i) tax attributes associated with less informative disclosures under the prior standard and (ii) substantive improvements to balance sheet reporting of deferred taxes and tax disclosures following SFAS 109 adoption. Results of a path analysis suggest that SFAS 109 adoption aided individual investors directly and indirectly via a decrease in analyst forecast dispersion. Collectively, the evidence is consistent with SFAS 109 benefitting individual investors by improving the accessibility and informativeness of financial reporting on income taxes. Our findings highlight the importance of evaluating how improved accounting standards can benefit a key stakeholder of the SEC and FASB: individual investors.