Asset Write-Offs and Discretionary Accruals: Roles of Executives' Incentives, Corporate Governance, and Market Reaction*

This paper examines: (1) whether earnings management incentives affect the association between discretionary accruals and asset write-offs that fall under the auspices of the Taiwan's Statement of Financial Accounting Standards (SFAS) No. 34/35, (2) how corporate governance mechanisms react to management discretionary behaviors, and (3) whether the market response to write-off announcements has any relation to firms' existing governance structures. The results indicate that "big bath" (income smoothing) firms have a higher propensity to take SFAS No. 35 (SFAS No. 34) write-offs and select income-reducing discretionary accruals to manage earnings downward, relative to their respective counterparts. Additional analyses reveal that strong governance mechanisms seem to be more effectively to constrain the smoothing activities relative to the "big bath" behavior. The evidence also support the notion that write-off disclosures are regarded as revealing information about undesirable earnings management behavior, which investors believe can be constrained by a strong governance setting.