Determinants and Consequences of Timely Asset Impairments During the Financial Crisis

Journal of Business Finance & Accounting (2017)

Posted: 4 Oct 2017 Last revised: 15 Feb 2023

See all articles by Joshua L. Gunn

Joshua L. Gunn

University of Pittsburgh - Katz Graduate School of Business

Inder K. Khurana

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business

Sarah E. Stein

Virginia Tech

Date Written: October 1, 2017

Abstract

U.S. firms recorded an unprecedented number of asset impairments during the recent financial crisis. We investigate the timing of these losses in the context of two competing views on how firms use discretion over asset impairments. The first view posits that firms record impairments to convey private information as part of their commitment to a conditionally conservative reporting strategy. The second view argues that firms use their discretion to report opportunistically by delaying the recording of bad news. Consistent with the first view, we find that firms recorded timelier asset impairments during the financial crisis if they reported more conservatively in the five years preceding the crisis. Further tests show this relation is greater for firms with strong corporate governance, industry-specialist auditors, and high leverage, indicating the importance of monitoring mechanisms in determining how firms handle the discretion involved in impairment decisions. We also test for the consequences of timely asset impairments during the financial crisis and find that firms reporting conservatively both before and during the crisis were able to acquire more debt financing, and their publicly traded bonds suffered smaller increases in illiquidity. Collectively, our study highlights the role of asset impairments in firms’ accounting choices over time.

Keywords: asset impairments, monitoring, conservatism, debt contracting, bond illiquidity

JEL Classification: M40, M41, G01, G34

Suggested Citation

Gunn, Joshua L. and Khurana, Inder and Stein, Sarah E., Determinants and Consequences of Timely Asset Impairments During the Financial Crisis (October 1, 2017). Journal of Business Finance & Accounting (2017), Available at SSRN: https://ssrn.com/abstract=3046591

Joshua L. Gunn

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

Inder Khurana

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business ( email )

331 Cornell Hall
Columbia, MO 65211
United States
573-882-3474 (Phone)
573-882-2437 (Fax)

Sarah E. Stein (Contact Author)

Virginia Tech ( email )

250 Drillfield Drive
Blacksburg, VA 24061
United States

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