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Asset Writedowns: Managerial Incentives and Security Returns

Asset Writedowns: Managerial Incentives and Security Returns Asset Writedowns: Managerial Incentives and Security Returns JOHN S. STRONG and JOHN R. MEYER* OVERTHE PAST FIVE YEARS, American corporations have taken aftertax writeoffs of over $10 billion dollars from discontinued operations and reductions in the book value of assets. During 1985 alone, over $5.6 billion in writedowns were recorded. If the sheer size of this restructuring is stunning, so too is the speed at which this practice has grown. According to COMPUSTAT data, aggregate writeoffs for all corporations totaled only $400 million in 1980.’ This practice of writing down assets has been widely heralded by the financial media. However, with the exception of a few papers on the effects of spinoffs and divestitures: there has been little research on the writedown decision and its effect on security values. This paper is divided into six sections. The first section describes how the substantial flexibility accorded by current accounting standards shapes managerial incentives to concentrate writeoffs and establish large reserves with probability of subsequent reversal. The second section discusses capital budgeting aspects of asset writedowns. To understand how the operating and financial environment influences the writedown decision, the third section analyzes the ex ante financial performance (relative to their http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

Asset Writedowns: Managerial Incentives and Security Returns

STRONG, JOHN S.; MEYER, JOHN R.
The Journal of Finance , Volume 42 (3) – Jul 1, 1987
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References (12)

Publisher
Wiley
Copyright
1987 The American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.1987.tb04574.x
Publisher site
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Abstract

Asset Writedowns: Managerial Incentives and Security Returns JOHN S. STRONG and JOHN R. MEYER* OVERTHE PAST FIVE YEARS, American corporations have taken aftertax writeoffs of over $10 billion dollars from discontinued operations and reductions in the book value of assets. During 1985 alone, over $5.6 billion in writedowns were recorded. If the sheer size of this restructuring is stunning, so too is the speed at which this practice has grown. According to COMPUSTAT data, aggregate writeoffs for all corporations totaled only $400 million in 1980.’ This practice of writing down assets has been widely heralded by the financial media. However, with the exception of a few papers on the effects of spinoffs and divestitures: there has been little research on the writedown decision and its effect on security values. This paper is divided into six sections. The first section describes how the substantial flexibility accorded by current accounting standards shapes managerial incentives to concentrate writeoffs and establish large reserves with probability of subsequent reversal. The second section discusses capital budgeting aspects of asset writedowns. To understand how the operating and financial environment influences the writedown decision, the third section analyzes the ex ante financial performance (relative to their

Journal

The Journal of Finance – Wiley

Published: Jul 1, 1987

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