Clandestine Accounting : Variable Interest Entity Consolidation, Financial Leverage and Tax Shelter Participation

We use event study techniques to investigate market participants' ex ante perceptions regarding the benefits and burdens of Interpretation Nos. 46 and 46R, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46/R). The evidence suggests investors believed the costs of complying with FIN 46/R would significantly outweigh any purported improvements in the quality of accounting information. However, investors also appear to have recognized that the standard would improve information quality for highly levered firms and appropriately limit managerial rent extraction through the use of tax shelters