Graduation Year

2017

Date of Submission

4-2017

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics-Accounting

Reader 1

Matthew Magilke

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Rights Information

© 2017 Khadijah A Omerdin

Abstract

This paper will analyze the usefulness of depreciation expense to investors. Depreciation expense is a broad allocation accounting practice that treats different types of assets the same. I argue that there are two types of industries: those with wasting assets, and those with real property. The first type experiences true deprecation and deterioration while the second type of asset does not. A simplified model using the earnings response coefficient will measure the relationship between earnings and returns for these different industries; this measurement is a way to quantify usefulness of accounting information. I hypothesize that investors of companies with high wasting assets will find depreciation more useful than those invested in companies with more real property. However, the results were not consistent with my hypothesis – depreciation did not matter more to investors of the industry with high wasting assets. The data set only included two distinct industries, which limited the sample size considerably, and might explain the results. Alternatively, the two groups of assets could be defined more broadly to include more industries for future research.

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