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

Earnings Informativeness of Long-Lived Assets Impairment Recognized and Reversals 210 correct valuations for long-lived assets on balance sheets as asset impairment is recognized, i.e., it provides more faithful identification and recognition of asset values (Fan and Chen, 2009). Future earnings, which provide an approximation of the intrinsic economic value of the underlying impaired assets, is expected to give a better signal of current returns and enhance earnings informativeness. In addition, Warfield and Wild (1992) and Collins et al. (1994) pointed out that the accounting measurement process triggers a non-contemporaneous return-earnings association, e.g., a lack of timeliness which should result in current returns positively correlating with changes to future earnings. Lundholm and Myers (2002) also argue that current returns over the year are partly due to the unexpected portion of the current year’s earnings realization and partly due to changes in expectations about future earnings. It implies that changes in (expected) future earnings may be due to a shock that has no effect on current earnings, which is not captured by current earnings, yet will be reflected in the current stock price (Tucker and Zarowin, 2006). Note that reported future earnings should absorb different motivations for asset write-offs, such as managerial incentives or economic factors, at gradual time intervals. Current return is expected to reflect information beyond future earnings after the recognition of asset impairment that is embedded in the asset’s impairment. If impairment recognition can produce more correct valuations for long-lived assets, even with noise, the valuation process impacts investor expectations of future cash flows generated by the impaired assets, and hence returns. Inspired by the framework proposed by Collins et al. (1994) and Lundholm and Myers (2002), the process of valuing impaired assets can, to some extent, improve the non-contemporaneous return-earnings association resulting from the accounting measurement process. On the other hand, managers’ decisions on asset impairment may, to some extent, play a role in conveying informative private information regarding a firm’s future unfavorable operating environment (Francis et al., 1996; Loh and Tan, 2002). If a firm reveals news related to its future earnings through asset write-offs, realized future earnings will be reflected in current returns, although asset write-offs still suffer from some degree of measurement error. In this case, the coefficient on future earnings will be positive in the returns regressions. It is expected that more extensive recognition of asset impairment implies poor future performance. If asset impairment decisions adequately convey a firm’s economic condition through expectations of poor future performance, this informative signal increases the predictability of the impact of asset impairment on subsequent earnings performance and enhances earnings informativeness. Accordingly, it either