Charles J. P. Chen
City University of Hong Kong
Shimin Chen
University of Louisiana at Lafayette
Xijia Su
City University of Hong Kong
Yuetang Wang
Nanjing University
Abstract: Understanding the incentives for and consequences of accounting method choices is important to various constituents of accounting. A Chinese accounting regulation in 1998 allowed listed companies for the first time in history to voluntarily write down assets through the income statement. The regulation was amended in 1999 to mandate the write down for all companies. These events allowed us to identify unambiguously the firms that voluntarily wrote down assets in 1998 and those that suffered from asset impairment but chose not to write down. Taking advantage of this unique opportunity, this study provides additional evidence on the incentives for and consequences of voluntary asset write-down. Overall, we find a positive market response to the voluntary asset write-down. While there may be alternative explanations for this positive market effect, we focus our interpretation on the voluntary write-down being a signal of performance improvement and provide some supporting evidence in the study.
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