SFAS 121 Asset Write-Down: Early vs. Late Firms
29 Pages Posted: 3 Oct 2001
Date Written: August 28, 2001
Previous research shows that capital market positively values firms whose motivation is to gain production efficiency by streamlining their assets as part of their restructuring campaign. In this study, we examine 47 firms that voluntarily disclosed asset write-down information in either 10-K or ARS one year prior to the mandatory adoption of SFAS No. 121.
We document the following empirical evidence: firstly, EARLY firms, pursuing production efficiency through restructuring efforts, experience more positive market reaction than LATE firms at the disclosure of asset write-down decisions, consistent with efficiency enhancement arguments. This evidence is robust to the selection of an alternative control group, matched in terms of asset size and industry classification codes. Secondly, EARLY firms incur more capital expenditures, acquire less intangibles, and exhibit lower asset turnover ratios and a shorter asset age than LATE firms. Finally, EARLY firms exhibit higher profitability, and higher effective tax-brackets than LATE firms when the voluntary decision of asset write-down is made.
Previous studies that have examined the issue of asset write-down cross-sectionally aggregate the sample firms, and thus fail to recognize the different motivations behind different firms. In this paper, we enhance our analysis by employing a voluntary disclosure sample, a control sample of companies that made their asset write-down disclosures in the first fiscal year of mandatory adoption, and another control sample (MATCHED CONTROL), which did not make any asset write-down disclosures in either the voluntary year (1995) or the mandatory year (1996). We hope that this paper sheds light on the determinants that motivate firms to voluntarily disclose the asset write-down information in their 10-K reports or annual reports to shareholders one year prior to the mandatory adoption of SFAS No. 121.
JEL Classification: G12, G34, M41, M45
Suggested Citation: Suggested Citation