An Examination of Long-lived Asset Impairments: Write-off Characteristics, Timeliness, and Market Reaction

10.6293/AQAFA.2011.09.05

Chia-Ling Chao；Shwu-Min Horng

Impairments ； Earnings management ； Timeliness ； Market reaction

Advances in Quantitative Analysis of Finance and Accounting

9期（2011 / 06 / 01）

113 - 146

英文

This paper adds to the growing body of literature on managers' discretionary accounting choices in general by specifically studying several issues related to the Statement of Financial Accounting Standards (SFAS) No. 144, ”Accounting for the Impairment or Disposal of Long- Lived Assets.” Our investigation starts by contrasting the characteristics of asset write-offs reported prior versus subsequent to the issuance of SFAS No. 144. The analyses reveal that write-offs reported under SFAS No. 144 have significantly lower associations with executives' reporting incentives, including debt contracting, ”big bath,” income smoothing, and management turnover, and marginally higher associations with firmspecific economic factors, relative to those reported prior to the standard. Results for the write-off timeliness tests show some evidence of the delay in recognition of asset impairment within both the pre- and post-SFAS No. 144 regimes. The security market over the periods preceding a write-off already takes into account any decline in asset value reflected in the write-off amount. However, the analyses fail to provide evidence of a difference in the timeliness of asset write-offs across the two regimes. Finally, we study the association between the market reaction to write-off announcements and the probability of a write-off produced by our write-off likelihood model. The results provide support for the notion that our write-off prediction model proxies for the unobservable market expectations. The findings also reveal a negative stock price response to ”unpredictable” asset write-offs. The above implications are robust to a number of alternative specifications and variables definitions.

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