Accounting Choice Decisions and Unlevered Firms: Further Evidence on Debt/equity Hypothesis

This study extends the accounting choice literature by empirically examining a set of firms that do not have long-term debt (unlevered) in their capital structure. Currently, evidence on how these firms make accounting choice decisions is scarce. Empirical evidence on this issue is important for two reasons. First, the case of unlevered firms serves as an additional testing ground for the positive theory of accounting choice and the findings are likely to enhance our understanding of accounting choice decisions per se. Second, it offers light in the area of generalizability of debt/equity and political cost hypotheses, particularly to smaller firms. The results indicate that unlevered firms tend to choose income-increasing accounting methods more than their levered counterparts. This is particularly true in the case of inventory method choice. It appears that even without the presence of long-term debt, leverage, measured as total short-term liabilities over equity, is a significant determinant of accounting choice. Finally, political cost hypothesis does not seem to apply to smaller firms.