Discussion of Write-Offs As Accounting Procedures to Manage Perceptions

Abstract

The paper by Elliott and Shaw reports the results of a descriptive study of various characteristics and consequences of large write-offs (i.e., big baths). While the main focus is on the earnings and stock price performance of a sample of firms with large write-offs, data on the timing, magnitude, and form of disclosure for large write-offs are also provided. The authors motivate their paper by policy considerations, citing recent FASB and SEC interest in write-offs. The conference discussion focused on the heterogeneity of write-offs with regard to motives, economic circumstances, and degree of anticipation by investors and the resultant implications for design of the tests. Pursuant to this, participants offered several suggestions for other dimensions on which the sample could be described. Additionally, some participants made suggestions for motivating some of the tests in order to clarify what is learned from the empirical analysis. Conference participants' comments and subsequent revisions to address those concerns are summarized in section 2. In my opinion, the primary concern underlying the conference discussion is the paper's failure to identify and consider managers' economic incentives in making decisions to affect income via large write-offs. In fact, the explicit consideration of economic incentives allows the researcher to structure empirical tests to address specific questions, thereby defining a unique direction to the analysis. I provide some comments on this issue in section 3, in the interest of suggesting areas for future research.