Do Regulatory Requirements Influence Managers’ Information Processing Bias in Impairment Decisions?
Posted: 24 Oct 2014
Date Written: October 21, 2014
We conduct an experiment to investigate how regulatory requirements in the accounting for impairment, namely, reversibility of impairment losses and disclosure of impairment assumptions, influence managers’ bias in the processing of impairment information. Our results show that regulatory requirements influence managers’ information evaluation bias but not their bias in the search process. We find that managers’ evaluation of impairment information is not biased when impairment losses are reversible. When impairment losses are not reversible, the direction of bias depends on whether managers are required to make a full or partial disclosure of the impairment assumptions. When managers are required to disclose all assumptions regardless of their impairment decisions, managers tend to exhibit favorable evaluation of positive information about the asset and unfavorable evaluation of negative information about the asset. However, when managers are required to disclose assumptions only when impairment losses are recognized, a reverse behavior is observed, with managers being more prone to evaluate negative information favorably. Despite the significant information bias, we do not find a link between information bias and managers’ decisions to recognize impairment. Future research involving more experienced managers will investigate this issue.
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