RIEB Discussion Paper Series No.2020-31

RIEB Discussion Paper Series No.2020-31


Incorporating Piecewise-linear Variables into an Empirical Model of Non-current Asset Impairment Timeliness


While prior research employs linear stock returns as a proxy for economic losses, this study uses piecewise-linear stock returns to separate positive and negative stock returns. It also examines the relationships of non-current asset impairments with changes in sales and cash flows from operations, which can be viewed as short-term indicators of economic impairments. I find a negative relationship between non-current asset impairments and negative stock returns in year t–5, consistent with prior research. I also find such a relationship in year t, contrary to prior research. The results indicate that the relationships are stronger in years t–1 and t–2 than in years t and t–3. These results suggest that non-current asset impairment losses reported by Japanese firms are consistent with the Japanese accounting standard, although such losses are not necessarily reported in a timely manner. In addition, I find evidence suggesting that changes in sales and cash flows from operations in year t are short-term indicators of non-current asset impairments. Overall, incorporating piecewise-linear variables improves the empirical model of non-current asset impairment timeliness.


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