DETERMINANTS OF THE CHOICE OF ACCOUNTING FOR SHORT-TERM MARKETABLE SECURITIES OF SINGAPOREAN COMPANIES

Abstract

Until 1988, firms in Singapore used a diverse range of approaches to determine the carrying amounts of short-term marketable securities. However, after October 1988, following the implementation of SAS 25, firms were required to adopt either the market value or the lower of cost and market value approaches to determine carrying amount. This study empirically examines factors potentially influencing firms' decisions to use the lower of cost and market value either at an individual basis or at an aggregate portfolio basis in 1990. The firm's choice is explained in terms of contracting costs, political costs, and financial slack. Specifically, the study hypothesises that the choice may be affected by the (1) existence of debt covenants, (2) existence of a management compensation plan, (3) size of the firm, (4) ratio of cash and marketable securitie3 to total tangible assets, and (5) price-earning ratio. The univariate analysis indicates that the existence of debt covenants, the ratio of cash and marketable securities to total tangible assets and the price-earning ratio explain the firm's accounting choice at a significance level of five percent. However, firm size and the existence of a management compensation plan are not significant at this level. The results of the multivariate profit analysis show that only the existence of debt covenants and the ratio of cash and marketable securities to total tangible assets are significant.