This paper empirically investigates whether accounting for software costs, mandated by the Financial Accounting Standards Boards' Statement No. 86 (SFAS No. 86), affects corporate earnings variability and earnings forecast errors. Using the software industry data, relative to the expensing alternative, the capitalization and subsequent amortization of software development costs increase earnings variability and analysts' forecast errors and that earnings variability is positively correlated with analysts' forecast errors.
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