Earnings Informativeness of Long-Lived Assets Impairment Recognized and Reversals

This study examines how recognition of long-lived asset impairment influences the amount of current and future earnings that are embedded in current stock returns. Note that Taiwan accounting standards permit an impairment on a long-lived asset to be reversed if the asset's economic value recovers. We further examine whether firms with reversed asset impairment show significantly distinctive informativeness patterns of future earnings when compared with non-reversed firms. Based on unbalanced-panel data, empirical results conform with expectations, i.e., the informativeness of current (future) earnings decreases (increases) in firms with a large magnitude of recognized long-lived asset impairment. We also find that this increased informativeness of future earnings for firms with impairment is mitigated in the reversals subsample, which supports the managerial incentives hypothesis of impairment decisions. This study implements some diagnostic checks and demonstrates that our results are robust to various specifications.