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Causes and Effects of Discretionary Asset Write-Offs

1996; Wiley; Volume: 34; Linguagem: Inglês

10.2307/2491429

1475-679X

Jennifer Francis, J. Douglas Hanna, Linda Vincent,

Financial Distress and Bankruptcy Prediction

This paper provides evidence on the causes and shareholder wealth effects of discretionary asset write-offs. We use the term write-off to refer to both complete and partial downward asset revaluations, and we describe our sample write-offs as discretionary because over the 1989-92 period covered by the study, there was little authoritative guidance on the accounting for most types of asset impairments, other than inventory. The absence of explicit guidance for many assets permitted substantial management discretion about amounts and timing of write-offs. The American Institute of Certified Public Accountants urged the Financial Accounting Standards Board in 1980 to examine the asset impairment issue because they believed that the variety of practices, terminology, and valuation methods in use reduced the comparability and consistency of financial statements. These concerns, echoed by the Emerging Issues Task Force, the Financial Accounting Standards Advisory Committee, the Financial Executives Institute, and the National Association of Accoun-