Incentives for and Consequences of Initial Voluntary Asset Write‐Downs in the Emerging Chinese Market

Understanding the incentives for and consequences of accounting method choices is important to various constituents of accounting. In 1998, a Chinese accounting regulation allowed listed companies to voluntarily write‐down assets through their income statements. The regulation was amended in 1999 to require all companies to write‐down assets, with a retroactive adjustment of pre‐1998 asset impairment to the beginning equity. These events allow us to unambiguously identify a test sample that voluntarily wrote down assets in 1998, and a control sample that suffered from asset impairment but chose not to write‐down. This research setting is free from many problems that have been identified in the asset write‐down literature. Overall, we find that the voluntary asset write‐downs have a positive valuation effect. While recognizing the possibility of alternative explanations, we believe our results, taken together, are more consistent than others, with the voluntary write‐downs being a signal of the potential for performance improvement. We provide evidence consistent with this signaling explanation. This study adds additional evidence to the accounting choice literature by taking advantage of a unique research opportunity in China and adopting a broad approach to examining both the incentives for and consequence of voluntary asset write‐downs.