The Determinants and Effects on Earnings Informativeness of Asset Impairments: The Role of Corporate Governance

This paper examines the effects of corporate governance on both the determinants and earnings informativeness of asset impairments. The current evidence is mixed on the determinants of asset impairments and much of this literature has focused on an opportunistic explanation. We suggest that the mixed evidence might arise from missing the corporate governance factor in the research framework. Accordingly, we hypothesize that the accounting choice for asset impairments is dominated by efficient contracting (opportunistic reporting) while corporate governance is strong (weak). Consistent with this expectation, our empirical result shows that while firms have strong (weak) corporate governance, the magnitude of asset impairment is mainly explained by the firm's economic conditions (opportunistic reporting by managers), which thereby improves (deteriorates) the informativeness of earnings. In short, this study demonstrates that corporate governance does play an important role in managers' accounting decisions for asset impairments.