臺大管理論叢 NTU Management Review VOL.29 NO.1

209 NTU Management Review Vol. 29 No. 1 Apr. 2019 and compensation in the future (Frantz, 1999). Asset impairment is noisy in this circumstance, which explains why the market may respond negatively, as documented by Elliott and Shaw (1988). Riedl (2004) also found a weaker association between economic factors and asset write-downs, suggesting a decrease in the quality of write-off information following SFAS No. 121. Yet, to date, it is still unclear which factor dominates firm asset impairment decisions. Recognized impairments, either through managerial reporting incentives or economic factors, should cause write-off firms to record unrealized losses in their income statements. If investors cannot distinguish the characteristics of asset write-offs, unrealized impairment loss should be taken as noise impounded in the current earnings which, in turn, would deteriorate the contemporaneous return-earnings relationship. In other words, relatively noisy asset impairment recognition reduces the use of current earnings in predicting future cash flow and hence firm value. 5 We note that, in an efficient market framework, a noise embedded in earnings is uncorrelated with returns, not only in the current period but in all lead and lag periods as well (Collins et al., 1994). However, in their expectations of future earnings and/or cash flows, investors do not look beyond current earnings that will be affected by embedded asset impairment. In this case, the “noisy” earnings component of the written-off assets will weaken the contemporaneous return-earnings relationship. Although previous studies proposed competing hypotheses for asset write-offs, e.g., managerial incentives or economic factors, it is reasonably expected that current earnings are less informative given the recognition of asset impairment. Thus, our first hypothesis is developed as follows: H1. Ceteris paribus , the informativeness of current earnings is lower for firms with recognized asset impairment. One characteristic of asset write-offs is that impairment implicitly influences future reported earnings, e.g., through amortization or further impairment diagnostic checks. Prior studies have found that recognition of the impairment of long-lived assets is informative about future firm performance (Easton, Eddey, and Harris, 1993; Aboody et al., 1999; Barth and Clinch, 1998; Gordon, 2001). SFAS No. 35 should produce more 5 Long-lived assets impairment also can be considered a non-recurring item. Non-recurring items are often viewed as transitory, having zero persistence and lacking the ability to predict future performance and firm value (e.g., Jones and Smith, 2011; Burgstahler, Jiambalvo, and Shevlin, 2002).