What Drives Companies? An Analysis of Fixed Asset Write-Offs in Europe in the Context of Different Institutional Settings

Abstract

Based on a sample of 1,300 companies from the EU15 member states, this study examines the factors that influence fixed asset write-offs in Europe. Using the Cragg model for the corner solution outcome of asset write-offs we are able to separately analyze the determinants of the write-off decision and of the write-off magnitude. We show that in general the write-off decision seems to be driven by asset impairment while the write-off magnitude seems to be driven by earnings management. Further analyses are conducted of the write-offs separated into country clusters. We cannot confirm our assumption that earnings management decreases with greater investor protection, but we show that companies from ‘outsider economies’ use income smoothing and big bath accounting to determine the write-off magnitude. We do not find such clear patterns for ‘insider economies’, but nevertheless we are still able to show that it does not seem to be asset impairment alone that drives asset write-offs. By partitioning our sample period into two sub-periods we can additionally show that the processes that determine write-offs become more similar for ‘outsider economies’ and ‘insider economies with strong enforcement’, while those of ‘insider economies with weak enforcement’ change individually. We see that the influence of asset impairment seems to decrease over time.

Keywords: write-off, Europe, Cragg model, earnings management, asset impairment

JEL Classification: M40, M41, M48