An Empirical Examination of Asset Impairments: Evidence from Taiwan*

Abstract

This paper examines adoption timing motives, write-off characteristics, and the stock price reaction with respect to the adoption of the Statement of Financial Standards (SFAS) No. 35, Accounting Treatment of Asset Impairments. Empirical results show that early adopters are more likely to be in industries with favorable performance in the pre-adoption period, are larger in size, and appear to be acting in a manner consistent with the big bath behavior. Turning to the analysis of write-off characteristics, I find that the amount of asset write-offs is significantly greater for firms with lower market value relative to the book value of equity and for firms with poor financial performance. The results also reveal that managers tend to apply the reporting flexibility in the determination of write-off amounts to report a smoother stream of earnings, and that the amount of asset write-offs is significantly greater for firms with a management change and for large firms that delayed adoption. Finally, the study documents that, for early adopters, the market responds negatively to both the anticipated and unanticipated portions of impairment losses. For late adopters, the market's reaction is insignificant to the portion of write-offs that is anticipated. However, to the portion that is unanticipated, the market responds more negatively and significantly. Taken together, the findings from the market test analysis imply that all of the asset write-offs announced by early adopters and the unanticipated portion of the impairment losses for late adopters both convey information of a reduction in future performance to market participants.