Asset Impairment Accounting Decisions and Employee Downsizing in Japan


Given the long-term relationship between firms and employees, the literature suggests that managers enhance the informativeness of accounting numbers in anticipation of employee negotiations to inform their employees of the firm's underlying economics. This study complements and extends the existing literature by investigating whether asset impairment losses play a signaling role in downsizing negotiations and whether variations in employee influence over firms lead to different impairment accounting practices. Specifically, using a large sample of Japanese firms operating in an environment where employee downsizing is difficult to implement, I find that asset impairment loss recognition mitigates the negative relationship between employee ownership and downsizing, suggesting that impairment losses signal firms' future negative outlooks. In addition, the results suggest that impairment recognition is costly for managers and impairment losses reflect economic losses, consistent with the informative reporting hypothesis. Importantly, I also find that downsizing firms with strong employee bargaining power recognize asset impairment losses earlier around downsizing implementation than those with weak employee bargaining power, suggesting that such an accounting practice by downsizing firms with strong employee bargaining power elicits concessions from employees.


Labor negotiation, Asset impairment, Employee ownership, Downsizing

JEL Classification

G34, J54, M41


Research Institute for Economics and Business Administration,
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501 Japan
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