Atul Rai

An upper-level intermediate accounting course taught at two large mid-west universities in the United States provides a natural experimental setting to examine whether teaching debits/credits in the introductory financial accounting course matters. Students in the upper-level course fall into two groups: those who learned debits/credits in the introductory course and those who weren’t. The performance of both groups is evaluated during the semester while they take the upper level accounting course. Regression results show that the prior knowledge of debits/credits offers only a mild advantage in the first mid-term exam, but not thereafter. Results also indicate that grade point average (standardized tests like ACT scores) are a good (not a good) predictor of the performance in the upper-level accounting class. These results suggest that teaching debits and credits in the introductory accounting course does not provide any advantage in learning the material of upper-level accounting course.

Type of the article: Research Article

Abstract
Investment efficiency is crucial for investors and creditors. This study examines whether managers of publicly traded manufacturing firms exhibit sunk-cost bias in capital expenditure decisions. Economic theory dictates that sunk costs – unrecoverable past expenditures – should be ignored in forward-looking decisions. Depreciation expense, which allocates historical capital expenditures under GAAP, represents such a sunk cost, yet limited empirical research tests whether it systematically influences capital replacement decisions.
Using regression analysis with Compustat data for U.S. manufacturing firms from 2003–2024, we examine whether capital expenditures are predicted by past depreciation expenses, controlling for established economic determinants including Tobin’s Q, cash flow, growth opportunities, and firm characteristics. Manufacturing firms are selected due to their heavy reliance on capital assets and substantial depreciation expenses.
The results provide strong evidence of sunk-cost bias: higher depreciation expense predicts significantly larger future capital investments, controlling for economic fundamentals. The depreciation coefficient is positive (0.0158) and highly significant (p < 0.01), contributing meaningfully to explained variance beyond traditional predictors. These findings suggest managers allow accounting allocations to influence economic decisions, affecting optimal asset replacement timing.
The findings alert investors that managerial capital allocation may be suboptimal and influenced by accounting measures rather than purely economic considerations. This bias may cause over-investment when depreciation is high and under-investment when depreciation is low, potentially affecting firm value and competitive positioning.