Determinants of Accounting Change: An Industry Analysis of Depreciation Change

This study examines whether the large number of depreciation-related accounting changes made by oil and gas drilling firms during the early eighties can be explained by changes in earnings prospects and related changes in agency cost variables. Empirical evidence, based on all thirty contract drilling firms for which data were available, shows that a model consisting of variables representing changes in sales, rig utilization rate and income before accounting change has significant explanatory and predictive power. Compared to a model consisting only of changes in sales, leverage or dividend constraint, models containing income change and rig usage change have better identification and prediction performance. The results imply that the dramatic declines in rig utilization during the early eighties, combined with related changes in income, led to the observed accounting changes in this industry.