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

Abstract

We examine the relative timeliness with which asset write-downs incorporate adverse macroeconomic outcomes versus adverse firm-specific outcomes. We posit that, compared to adverse macroeconomic outcomes, adverse firm-specific outcomes exhibit high information asymmetry between firm managers and users of financial reports, which provides managers with more ability to delay asset write-downs. We further posit that users of financial reports are more likely to attribute adverse firm-specific outcomes to suboptimal managerial actions, which incentivizes such delay. We provide evidence that, controlling for other incentives to manage earnings, firms record asset write-downs in the current year that are driven by adverse macroeconomic outcomes during both the current year and the next year, but they record write-downs driven by adverse firm-specific outcomes only in the current year. That is, in determining asset write-downs, managers anticipate adverse macroeconomic outcomes but not adverse firm-specific outcomes. We conduct cross-sectional analyses using proxies for information asymmetry and attribution of adverse firm-specific outcomes to managers that support the conclusion that higher values of these constructs induce greater delay in asset write-downs driven by adverse firm-specific outcomes.

Keywords: information asymmetry, attribution locus, asset write-downs, timeliness

JEL Classification: D82, D91, M41