Asset Write-downs Research Articles

Confucianism and the altruistic behaviour in the succession of family firms: evidence from asset write-downs

ABSTRACT This paper explores how Confucianism influences the altruistic behaviour during family firm successions. Using a sample of Chinese listed family firms which have transferred the power to family successors during 2005-2018, we find that family firms deeply influenced by Confucianism intend to take a big bath via asset write-downs in the year before the succession. Confucianism has stronger influence on altruism when the successor have closer blood relationship with the founder, when the successor is less educated, when the family have weaker control over the firm or when the firm is in a lower market position. When the board of directors is more independent or the auditor has higher reputation, the influence of Confucianism is weaker. Family firms with more asset write-downs have better short-term performance after the succession, but lower business reform and R&D inputs. These findings enrich the research on Confucianism and corporate governance of family firms.

Analisis Aset Pemerintah Daerah Kabupaten Tasikmalaya Tahun 2019-2020

The balance sheet as one of the local government financial statements consisting of assets that describe the condition of economic wealth owned by the local government, but in the balance sheet of the local government of Tasikmalaya Regency there is a decrease in assets, namely current assets and other assets. The purpose of this study is to analyze assets on the balance sheet of the local government of Tasikmalaya Regency so that it can be seen how the financial condition of the Tasikmalaya Regency Government is, how is the ability of the Tasikmalaya Regency Government to fulfill its obligations, and the indicators behind the decline in assets by using financial ratios. which consists of the liquidity ratio and solvency ratio. The research method used in this research is descriptive qualitative method with data collection techniques using observation, interviews, and documentation. While the validity of the data is tested by using data triangulation. The results showed that the financial condition of the Tasikmalaya Regency Government was in prime condition and the Tasikamalaya Regency Regional Government was very good at fulfilling its obligations as seen from the results of the analysis of liquidity ratios and solvency ratios. The decline in asset value in 2020 at the Tasikamalaya Regency Government was influenced by a decrease in current assets due to a decrease in cash and a decrease in other assets due to asset write-offs.

The spillover effect of shareholder activism: Evidence on firm reporting

This study examines the spillover effect of shareholder activism against target firms on financial reporting by non-target firms in portfolios held by the same activist shareholders. We find that firms that are not the target of institutional shareholders’ activism campaigns report more positive abnormal accruals. Cross-sectional tests indicate that the effect is more pronounced i) for firms that have more opportunities to engage in upward earnings management, or for firms with less effective alternative monitoring forces, and ii)when investors are more sensitive to good news. We also find that the effect is stronger when activist shareholders are more experienced, are waging more confrontational campaigns against target firms, and have larger holdings in non-target firms. We further find that non-target firms tend to report lower magnitude of asset write-downs, are more likely to restate financial statements and meet or beat earnings benchmarks, and exhibit a more optimistic tone in their 10-K/10-Q filings. Overall, our findings suggest that firms tend to window-dress their mandatory reporting to preempt possible shareholder activism against them.

Information Asymmetry, Attribution Locus, and the Timeliness of Asset Write-downs

Information Asymmetry, Attribution Locus, and the Timeliness of Asset Write-downs

Asset Write-Offs Prediction by Support Vector Machine and Logistic Regression

ABSTRACT The purpose of asset write-offs by a firm is to provide an accurate valuation of the firm and to reveal its true business performance from the perspective of economic conditions. However, the decision to write-off assets might be manipulated by the manager of the firm and thus misguide the public to an incorrect firm value. The aim of this study is to provide quantitative prediction models for asset write-offs based on both firms’ financial and managerial incentive factors. The prediction is achieved in two stages, where the first stage conducts a binary prediction of the occurrence of asset write-offs by a firm, while the second stage predicts the magnitude of such asset write-offs if they took place. The prediction models are constructed by support vector machine (SVM) and logistic regression for the binary decision of asset write-offs, and support vector regression (SVR) and linear regression for the write-off magnitude. The performances of different models are compared in terms of various criteria. Moreover, the bagging approach is used to reduce the variance in samples to improve prediction performance. Computational results from empirical data show the prediction performances of SVM/SVR are moderately superior to their counterpart logit/linear models. Moreover, the prediction accuracy varies with the distinctive types of asset write-offs.

Target Firm Accounting Conservatism and Corporate Acquisitions: Transferring Wealth or Benefiting Both?

Because conservative accounting practices induce firms to report bad news earlier and defer good news disclosure, accounting conservatism in target firm accounting can hinder acquirers from identifying a potentially profitable target while it can help acquiring firms mitigate the downside risk stemming from future asset write-downs and investment inefficiency. After controlling for other accounting attributes and governance mechanisms, our analysis reveals that a firm is more likely to receive an acquisition offer when its financial reporting is more conservative. More importantly, while an acquirer’s acquisition performance turns out to be greater when the target firm’s accounting is more conservative, the acquirer and other investors pay larger takeover premiums to a more conservative target firm. Overall, our findings suggest that unlike other target firm accounting quality proxies that transfer wealth from the target to the acquirer shareholders, target firm accounting conservatism benefits the shareholders of both the acquirer and the target.

High-Quality Information Technology and Capital Investment Decisions

ABSTRACTWe examine the effect of high-quality information technology (IT) on management's capital investment decisions. Evaluating capital investment decisions with contemporary investment efficiency and long-term measures of investment effectiveness, we document a positive relation between high-quality IT and capital investment decision quality. In particular, we find high-quality IT is associated with more optimal levels of investment as well as fewer future fixed asset write-downs. We also disaggregate investment efficiency and find the relation with IT quality holds for investment decisions related to capital expenditures and acquisitions, but not research and development expenditures. Overall, our results suggest managers equipped with better internal information from higher-quality IT are able to make superior capital investment decisions. Our study contributes to the literature by providing evidence of a significant determinant of capital investment decision quality and documenting a specific mechanism that mediates the indirect effect of IT quality on future performance.JEL Classifications: D83; E22; G31; M15; M41.Data Availability: We thank InformationWeek for providing annual rankings that were previously published. All other data are publicly available from regulatory filings; we obtained data from the Compustat, Execucomp, and I/B/E/S databases.

Measuring Asymmetric Timeliness using Industry Output Volume Changes as the Proxy for News

We obtain industry output volume changes from the Census Bureau for 338 six-digit NAICS code manufacturing industries and from the Centers for Medicare & Medicaid Services for skilled nursing facilities as an example of a service industry. Industry output volume changes have distinct and largely desirable features as a news proxy to measure the asymmetric timeliness of (the accrual components of) earnings to good and bad news documented by Basu (1997) and the ensuing literature. Industry output volume changes (1) are exogenous to individual firms’ economic and accounting choices, as well as minimally correlated with firm characteristics that prior research shows are associated with statistical biases in measures of asymmetric timeliness; (2) reflect both the public and the private firms in the industry; and (3) have relatively short-run implications for firm performance, so that accounting rules typically require firms to recognize these implications in operating accruals. We exploit these features to reassess the previously identified drivers of asymmetric timeliness. We find that the use of industry output volume changes as the news proxy (1) enables researchers to demonstrate conditional conservatism through the asymmetric timeliness of operating accruals but not of write-downs of long-lived assets; (2) helps distinguish the effects of curtailment and cost stickiness on asymmetric timeliness; and (3) largely eliminates statistical biases in estimates of asymmetric timeliness.

High-Quality Information Technology and Capital Investment Decisions

We examine the effect of high-quality information technology (IT) on management’s capital investment decisions. Evaluating capital investment decisions with contemporary investment efficiency and long-term measures of investment effectiveness, we document a positive relation between high-quality IT and capital investment decision quality. In particular, we find high-quality IT is associated with more optimal levels of investment as well as fewer future fixed asset write-downs. We also disaggregate investment efficiency and find the relation with IT quality holds for investment decisions related to capital expenditures and acquisition but not research and development expenditures. Overall, our results suggest managers equipped with better internal information from higher quality IT are able to make superior capital investment decisions. Our study contributes to the literature by providing evidence of a significant determinant of capital investment decision quality and documenting a specific mechanism that mediates the indirect effect of IT quality on future performance.

Postrzeganie elastycznych regulacji rachunkowości w zakresie odpisów aktualizujących aktywa

Postrzeganie elastycznych regulacji rachunkowości w zakresie odpisów aktualizujących aktywa

Are state ownership and auditors’ locality determinants of asset write-downs? Evidence from China

After issuing the 1998 Accounting Standards, Chinese regulators implemented additional regulations in 2001 governing write-downs of impaired assets and required assessment of recoverable amounts for four additional asset categories. As the recoverable value cannot be obtained objectively, management can discretionally assess the magnitude of write-downs to affect bottom-line profit. This study used 7258 firm-year observations in China from 1998 to 2005 to examine whether the percentage of asset write-downs by state-controlled firms differs from non-state-controlled firms, conditional upon more conservative financial reporting rules, and investigate whether local auditors support managerial decisions on asset write-downs. The empirical findings support the tendency of state-controlled ownerships to have lower asset write-downs. Local auditors also support managerial decisions on asset write-downs, especially when the companies are controlled by local governments.

How Transparent are Firms About Their Corporate Venture Capital Investments?

Corporate venture capital (CVC) is one of the most important avenues for corporate innovation today, yet there can be unintended consequences related to anticompetitive practices. Recent scrutiny from regulators and policymakers underscores their growing desire for more information about firms’ CVC investment activities, even of those previously believed to be too small to matter. Using a comprehensive sample of 115 publicly-listed U.S. parent firms that owned 133 CVC firms, we document that for almost half of the firm-years in our sample, parent firms do not disclose any information about their CVC program. Among the parent firms that do disclose their CVC activities, we find that they disclose less when they make investments in industries outside of their core industry. Firms with a CVC program, relative to similar firms without a CVC program, tend to make more future acquisitions and report less future goodwill asset write-downs. This study documents the current state of affairs with respect to the amount of publicly available CVC information for a large sample of firms, an important starting point for regulators and policymakers to conduct an informed debate about whether disclosure requirements should be expanded.

The Effect of Institutional Investors on Financial Reporting Comparability in the U.S.: Evidence from Common Institutional Blockholders

We examine the role of institutional investors, in particular common institutional blockholders, in facilitating the financial reporting comparability of U.S. firms. We define common ownership as a situation where a given institutional investor holds at least 5% of shares in at least two firms in the same industry. We find that common ownership increases the comparability of a firm’s financial statements to those of its industry peers. The effect is stronger when common institutional blockholders invest in a higher number of firms in a given industry, when they hold a longer investment horizon/a larger stake in a firm, and when they rely more on public information. Next, we show that the effect of common ownership on the firm’s reporting comparability takes place through the hiring of industry auditor specialists and discretionary accounting choices (e.g., goodwill impairment, other asset write-downs, and non-recurring items). Finally, common ownership leads to an increased use of accounting-based relative performance evaluation in executive compensation, supporting the argument that common institutional blockholders help improve financial reporting comparability, which allows more efficient monitoring of managers.

Classification shifting within non-recurring items

This study examines whether managers shift income-decreasing special items to discontinued operations. We expect managers to engage in this form of classification shifting because discontinued operations are reported below income before extraordinary items and discontinued operations (IBXD) on the income statement. Consistent with this expectation, we find evidence suggesting that managers classification-shift asset write-downs to discontinued operations. Furthermore, we find that classification shifting from asset write-downs to discontinued operations is driven by firms with incentives to avoid reporting a negative IBXD and by firms with equity market benefits to classification shifting.

Identifying Conditional Conservatism in Financial Accounting Data: Theory and Evidence

ABSTRACTUsing a financial reporting and valuation model, we investigate the construct validity of Basu's (1997) asymmetric timeliness (AT) regression coefficient as a measure of conditional conservatism in corporate financial reporting. We predict that the AT coefficient will be positive even in the absence of conditional conservatism, and it will vary with non-accounting factors even if the degree of conditional conservatism is held constant. Our empirical analysis shows that AT coefficient estimates vary in directions predicted by our theory. Specifically, we find that AT coefficient estimates increase with expected returns and asymmetry in the distribution of returns, and decrease with cash flow persistence. Importantly, we identify the spread between the variances of bad news and good news accruals as an alternative measure of conditional conservatism that is free of the effects confounding the AT coefficient. Consistent with a key implication of conditional conservatism, we find that the variance of bad news accruals is significantly higher than the variance of good news accruals primarily due to conditionally conservative accruals related to inventory write-downs, long-term asset write-downs, and goodwill impairments. A series of placebo tests provides additional support for the construct validity of our alternative measure of conditional conservatism.Data Availability: Data are publicly available from the sources indicated in the text.

Implications of Impairment Decisions and Assets' Cash-Flow Horizons for Conservatism Research

ABSTRACT Accountants examine multiple indicators when assessing whether individual assets are impaired. Different indicators predict cash flows over varying time horizons, and their importance varies with how far into the future individual assets are expected to generate cash flows. We predict that earnings exhibits asymmetric timeliness with respect to multiple indicators, including stock return, sales change, and operating cash flow change, which differentially explain write-downs of current assets, long-lived tangible assets, and indefinite-lived goodwill. We predict an interaction effect between indicators, such that the total impact of several consistent indicators is greater than the sum of their individual impacts. Empirical estimates for U.S. firms are consistent with our predictions and yield new insights about the effects of multiple indicators for both conservatism and impairment research. Our multi-indicator asymmetric models also change inferences about the relative explanatory power of economic factors versus reporting incentives in asset impairments. JEL Classifications: G32; L25; M41; M42.

The Role of Multiple Impairment Indicators in Conditional Conservatism

Accountants examine multiple indicators when assessing whether individual assets are impaired. Different indicators predict cash flows over varying time horizons, and their importance varies with how far into the future individual assets are expected to generate cash flows. We predict that earnings exhibits asymmetric timeliness with respect to multiple indicators, including stock return, sales change, and operating cash flow change, which differentially explain write-downs of current assets, long-lived tangible assets, and indefinite-lived goodwill. We predict an interaction effect between indicators, such that the total impact of several consistent indicators is greater than the sum of their individual impacts. Empirical estimates for U.S. firms are consistent with our predictions and yield new insights about the effects of multiple indicators for both conservatism and impairment research. Our multi-indicator asymmetric models also change inferences about the relative explanatory power of economic factors versus reporting incentives in asset impairments.

Does Non-Discretionary Conservatism Really Exist? -- Evidence and Implications from Japanese Listed Companies

This study extends several discussions regarding non-discretionary conservatism and documents evidence of non-discretionary conservatism in Japanese listed companies. Moreover, it finds that managerial opportunism cannot be completely ruled out even when asset write-downs are strongly warranted by circumstances. The findings of this study suggest that the current Japanese accounting regime for fixed assets’ impairment is likely to create an environment where management undertakes a more aggressive approach to earnings, specifically regarding the practice of recognizing asset write-downs, than their counterparts in the USA. The main implication of this study is that unconditional conservatism immunizes managerial opportunism that can arise from the subjectivity found in conditionally conservative accounting. Results of the quantile regression (QR) and least absolute shrinkage selection operator (LASSO) also indicate that current accounting standards, on their own, are inadequate to produce high quality accounting.

Estimated values: the provisions and the write-downs of assets as tools to manipulate financial results of enterprises

The purpose of using estimated values such as: provisions and write-downs of assets is to limit economic risk. Provisions should protect the entity against the adverse effects of future economic events that are possible to predict, and the write-downs of assets should protect the entity against overvaluation of its assets beyond their true value. However, in business practice, these estimates, are often used by the boards of companies to manipulate financial results, both as a tool to increase, as well as to decrease the result. The purpose of this study is to point out the problem of manipulating financial results of companies through the use of estimated values in the form of provisions and write-downs of assets. It seems that it should be taken seriously, and considered as one of the key problems of the theory, and in particular the practice of accounting. The following research methods have been used: an analysis of the literature, an analysis of normative acts, deduction method and comparison method.

Relevance of Goodwill Impairments to Cash Flow Prediction and Forecasting

This study examines the contribution of goodwill impairment information to the prediction and forecasting of future operating cash flows. Extending the framework of Barth, Cram, and Nelson, we find that explicitly including goodwill impairments incrementally improves 1-year-ahead cash flow prediction and forecasting. Improved cash flow forecasting is present over the entire 2001-2009 study period as well as for each year within the study window. In addition, goodwill impairments retain their significance and predictive power when other non-recurring charges (e.g., restructuring, asset write-downs, and merger and acquisition costs) are added to the model, both individually and aggregately, and when market-related information (i.e., change in market capitalization) is included in the model. While these findings are validated by in-sample prediction techniques, this study is also one of only a few studies to investigate the incremental, out-of-sample predictive power of non-current accruals on reported (as opposed to computed) operating cash flows. Analysts, investors, creditors, and others interested in future cash flows should separately consider goodwill impairment information, when available, to improve the accuracy of cash flow prediction and forecasting.