The Association between Corporate Governance Mechanisms and Impaired Asset Write-downs: An Empirical Study of Taiwan

• Main Authors: Chih-Shun Hsu, 許智順
• Other Authors: Wei-Heng Lin
• Format: Others
• Language: zh-TW
• Published: 2006
• Online Access: http://ndltd.ncl.edu.tw/handle/06369749247380812235

碩士 === 中原大學 === 會計研究所 === 94 === Taiwan’s Financial Accounting Standards Committee of the Accounting Research and Development Foundation issued SFAS No.35, “Accounting for Asset Impairment,” in July 2004. This accounting standard was effective for financial year ending after December 31, 2005, with early adoption encouraged. The primary objective of this paper is to contrast the earnings management incentives and corporate governance mechanisms of impaired asset write-down firms that adopt the standard in 2004 (early adopters) and 2005 (late adopters). Based on the literature before, there are two characteristics about write-downs. One is the information signaling perspective, write-downs help managers to convey the private information about the underlying economics beyond the historical cost accounting (Rees et al. 1996；Minnick 2004). The other is the opportunistic behavior perspective, write-downs are employed by managers to engage in “big bath” or “income smoothing” reporting behavior (Zucca et al. 1992；Riedl 2004). The issuance of SFAS No. 35 allows managers to exercise discretion over the timing and amount of asset write-downs. We investigate whether corporate governance mechanisms are likely to reduce information asymmetry problems and agency cost problems. The contrast of impaired asset write-downs across the two years is an interesting question. This study adapts a methodology proposed by Riedl (2004) to examine whether earnings management incentives and corporate governance mechanisms dominate the reported write-down firms between 2004 and 2005. The stacking of the equations allows statistical tests of differences in coefficient estimates across the two years. In our research, earnings management incentives variables include BATH, SMOOTH and DEBT; corporate governance mechanisms variables include IB, IS, SAME, BN and BH. Empirical results reveal that early adopters are associated with lower earnings management incentives and better corporate governance mechanisms, and late adopters are associated with higher earnings management incentives and worse corporate governance mechanisms. These results imply that early adopters use reporting flexibility to reveal their private information about the true value of the firm; alternatively, late adopters use this discretion opportunistically distort the underlying economics of the firm. Moreover, these results suggest that corporate governance mechanisms are introduced to communicate private information and reduce the information asymmetry between the firm and its investors. Meanwhile, the mechanisms are also designed to limit opportunistic behavior and reduce the agency cost between managers and all stakeholders. We argue that corporate governance mechanisms restrict earnings management incentives on the impaired asset write-downs. This paper contributes to the literature on asset impairments and corporate governance limit earnings management. The results of this study should be of interest to Taiwan’s Financial Accounting Standards Committee due to the multiyear adoption policy.