An Empirical Test of Stock Market Reaction for Recognizing Assets Impairment: The Case of Taiwan

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1 An Empirical Test of Stock Market Reaction for Recognizing Assets Impairment: The Case of Taiwan Li-Ling Yang, Assistant Professor, Department of Finance, China University of Science and Technology Tao-Sheng Chiu, Lecture, Department of Tourism and Leisure Management, Taiwan Hospitality & Tourism College ABSTRACT This research is an empirical study on the effects of reporting assets impairment as required under SFAS No.35 on stock price by examining 787 public enterprises which reported assets impairment between 2005 and This research further examines the market s response to enterprises of different characteristics which reported assets impairment. The empirical results show that: i) the market for enterprise recognized an impairment given a positive evaluation, investors believe companies recognized an impairment indicator of the future financial performance of the enterprise is a positive effect and can improve future return on assets; ii) the market reaction of assets impairment for traditional industries is not due to different asset categories for different market reaction, however, the market reaction for electronics industry is subject to the assets categories reactions, such as ownership investment assets impairment do not have explanatory power; iii) corporate economic characteristics factor for the margin of share price reaction, for electronics industry the total return on assets does not have explanatory power, firm size, corporate debt ratio has a negative relationship. Keywords: SFAS No.35, Assets impairment, Enterprise Evaluation INTRODUCTION For a long time, the working assets of enterprises are recognized according to the cost method which are subsequently depreciated or amortized according to their service life or are subject to revaluation increments to reflect their true values. Although this accounting method is easily understandable, it fails to reflect rapid changes in assets impairment caused by industrial technology, market and economics. In 2001, the International Accounting Standards Board announced IAS No.36 in relation to impairments of assets, followed by the announcement of SFAS No.144 by the US to regulate goodwill, intangible assets and other assets. If the book value of assets cannot be realized by way of subsequent use or sale, their book value should be reduced, and the loss of impairments should be recognized at the current year to prevent the recognition of fictitious assets so as to enhance the transparency of asset value in the financial statements. In order to make financial statements of enterprises in Taiwan truly reflect the economic value and consistent with the international accounting standards, Accounting Research and Development Foundation announced Statement of Financial Accounting Standard No.35 (hereinafter referred to as SFAS No.35 ) on July 1, Enterprises were required to report assets impairment pursuant to SFAS No.35 from 2005 or may choose to make reporting in the fourth quarter of In other words, enterprises in the past may decide whether or not to re-evaluate assets. However, the new standards The Journal of International Management Studies, Volume 9 Number 2, August,

2 required that the financial statements of enterprises shall satisfy the re-evaluation of assets impairment according to the financial accounting standards. The application thereof includes fixed assets, intangible assets, idle assets, recognized gain or loss of long-term investments, goodwill according to the equity method. Past studies in relation to assets impairment include (1) what are the characteristics of enterprises which report assets impairment? Is the reporting motivated by earnings management? (e.g. Strong and Meyer, 1987; Elliott and Shaw, 1988; Francis, et al., 1996; Rees, et al., 1996; Hogan and Jeter, 1998; Riedl, 2004); (2) what is the relationship between change of enterprise valuation and impairments if assets impairment are not recognized or announced? (e.g. Strong and Meyer 1987; Elliott and Shaw, 1988; Zucca and Campbell, 1992; Ragothaman and Bublitz, 1996: Bunsis, 1997; Bartov, et al., 1998; Alciatore, et al., 1998). Strong and Meyer (1987) and Ragothaman and Bublitz (1996) examined the effects of the announcement of assets impairment by enterprises on the stock return. According to research findings, when enterprises announced assets impairment, their stock prices went down. The higher the value of recognized assets impairment, the greater loss of the stock price was on the day of announcement. However, the empirical study conducted by Zucca and Campbell (1992) indicated that no negative market effects occurred when enterprises announced assets impairment. This illustrated that the market perceived the purpose of enterprises reporting of assets impairment as earnings management, not impairments to enterprises real asset values. Francis, et al. (1996) examined the cause for enterprises reporting of assets impairment and reviewed the market response to the reported assets impairment. The empirical results showed that most enterprises which have reported assets impairment experienced senior management changes. Moreover, enterprises reporting of assets impairment had negative effects on the market. Riedl (2004) undertook comparison of the correlations between the motivation behind reporting assets impairment and economic factors before and after the announcement of SFAS No.144. According to the research findings, the correlation between the motivation behind reporting assets impairment and economic factors after the announcement of the standard was lower than that before the announcement was made. It was instead more associated with the factor of taking a big bath. Based on the above researches, foreign literatures have mixed views on the effects of enterprises reporting of assets impairment on the market response. With respect to Taiwan s literatures, SFAS No.35 imposes mandatory requirement on enterprises to report assets impairment. In other words, when there is any sign showing impairments of enterprise assets, enterprises have to re-evaluate the assets and report the loss. Investors are generally concerned about the adverse effects of the implantation of SFAS No.35 on enterprises achievement of the profit target, leading to a lower stock price. This concern is particularly widespread in the electronic industry which is known for procuring great quantity of equipment assets. SFAS No.35 imposed mandatory requirement on enterprises to report assets impairment from 2005, or enterprises may choose to report assets impairment in the fourth quarter of 2004 ahead of the enforcement schedule. According to the study conducted by Lin and Liao (2005), the electronic industry suffered greater adverse effects from assets impairment compared to the non-electronic industry due to the short product life of electronic products. Wu and Hsieh (2005) studied public companies which chose to adopt SFAS No.35 in 2004 ahead of the enforcement schedule in order to examine the market response to enterprises announcement of assets impairment as well as the correlation between the amount of impairments of different types of assets and the stock return. The research findings showed that a significant negative correlation existed only between impairments of idle assets, long-term investments among all types of assets and the stock return. 76 The Journal of International Management Studies, Volume 9 Number 2, August, 2014

3 Regarding other types of long-term assets, such as goodwill, intangible assets and fixed assets, assets impairment have no significant effects on the stock return. Does the implementation of SFAS No.35 have information contents? What is the market response? If SFAS No.35 provides information contents which are viewed by investors as negative information because the reporting of assets impairment not only reduces the value of assets, but also declares drop in the projected cash flow, the stock return will become negative. If the change of stock return is not significantly correlated with the reporting, it means that investors do not view the reporting as negative information. The implementation of SFAS No.35 is to objectively present the value of impaired or idle assets in numbers. The implementation will not cause loss to the equity of shareholders or stakeholders, but it will rather serve as a signal of improvement of enterprises future performances. The purpose of this study is to examine investors response to SFAS No.35, and further study whether different market responses will arise from the reporting of assets impairment by enterprises of different characteristics so as to obtain research enlightenment and future research interest. This study is divided into five sections. Section Two is devoted to literature reviews in relation to assets impairment and stock response; Section Three sets forth the study design wherein study hypotheses and empirical model are proposed according to the study purpose; Section Four sets out the empirical results and analyses where under the samples are subject to statistical test; Section Five provides conclusion and recommendations by giving detailed explanation of findings. LITERATURE REVIEW Researches on information contents of earnings set out that if earnings information is useful for evaluating capital assets, then asset price will quickly respond to the information after earnings are announced. In other words, the earnings report of an enterprise will change investors expectation on the enterprise s future stock return, causing change to the equilibrium price of the stock. Both Ball and Brown (1968) and Beaver (1968) conducted respective studies on the relationship between the unexpected earnings, abnormal returns and abnormal volumes on the date of earnings announcement. According to their findings, there was a significant positive correlation between abnormal returns, abnormal volumes and change of earnings. Investors were unable to observe enterprises true earnings, but information asymmetry could be reduced through information disclosure by enterprises. If the implementation of the new financial accounting standard could affect the quality of earnings information, when enterprises announced the reporting of the accounting information required by the standard, how would the market respond to the effects of the said information on the enterprises projected future earnings? This study is intended to discuss how the implementation of SFAS No.35 affects investors evaluation on enterprises from the perspective of information transparency. SFAS No.35 clearly sets out the method that enterprises are required to use for assets evaluation and the basis for the evaluated amount. When assets are likely to be impaired, enterprises should re-evaluate the long-term assets, making financial statements fully reflect the true value of enterprise assets and reduce inflated earnings in disguise in their earnings information. This will enhance the association between the preceding period and the subsequent period as well as the quality of earnings information. The study by Strong and Meyer (1987) showed that stock prices went down when enterprises announced assets impairment. The higher the stock return was before the announcement, the sharper the stock price fell on the day of announcement. The greater the reported impairments of assets were, the larger percentage drop the stock price would be on the day of announcement. However, the The Journal of International Management Studies, Volume 9 Number 2, August,

4 stock price picked up 60 days after the announcement was made. This was the management s response to economic change instead of earnings management. Thus, the research suggested that enterprises reporting of assets impairment was a signal of improvement of future performance. Elliott and Shaw (1988) examined the accounting procedure that managers utilized in assets impairment. The research findings showed that US enterprises normally reported assets impairment in the annual financial statements certified by accountants. If the employee bonus program was based on accounting earnings, the management of enterprises was more reluctant to report loss of assets impairment. The research also concluded that the reporting of assets impairment reduced the stock return of enterprises. According to the research by Zucca and Campbell (1992), the announcement of assets impairment by enterprises did not cause negative market response. However, if the earnings performance in the preceding year and subsequent year of the reporting of assets impairment was relatively weak, the reporting of assets impairment was the exercise of discretion by the management to exercise earnings management rather than assets impairment. The research findings by Elliott and Hanna (1996) indicated that enterprises which continuously wrote off asset value often suffered operating loss. The more the write-offs were undertaken, the more loss that enterprises incurred and the lower the stock return was. Francis, et al. (1996) studied the causes for assets impairment reported by enterprises and reviewed the market response to such impairments. The empirical results showed that most enterprises reporting assets impairment experienced senior management change, and the loss arising from assets impairment had negative effects on the market. Bartov, et al. (1998) examined the long-term and short-term market response to enterprises reporting of assets impairment. The research findings showed that the market responded more negatively in the year when assets impairment were reported. Thus, the research concluded that the reporting of assets impairment by enterprises was primarily because enterprise assets were in fact impaired. In Taiwan, Wu and Hsieh (2005) studied the factors determining the timing that Taiwan s public companies adopted SFAS No.35 as well as responses of the stock market to the announcement of reporting assets impairment. The empirical results showed that the early adoption of the standard was primarily caused by the reporting motivation of senior management. However, in respect of those enterprises which adopted the standard according to the schedule, the reported amounts of assets impairment were affected not only by the reporting motivation of senior management, but also operating factors of enterprises. Lin (2005) studied the effects of the application of SFAS No.35 on the value relevance of accounting information of financial statements based on Ohlson equity valuation model. According to the empirical findings, when enterprises adopted financial accounting standard of assets impairment, the explanatory power of earnings on the stock price decreased while the explanatory power of the book value of shareholders equity on the stock price increased. Wang (2006) studied the factors determining the timing of adoption of SFAS No.35 and asset value relevance. The higher the stock return and price/book value ratio of the industry, the more motivation enterprises had to adopt SFAS No.35 ahead of schedule. Huang (2007) examined the effects of assets impairment on the stock price, analyst forecast as well as price-earnings ratio. The research showed that the announcement and implementation of SFAS No.35 imposed mandatory requirement on enterprises to conduct comprehensive review on the potentially unrealized loss of assets or important investments, which not only facilitated the transparency and stability of asset and earnings information, but also enhanced analysts estimate of enterprise earnings and the market s evaluation on enterprise earnings information. The empirical results of the study conducted by Chen (2007) showed that the losses arising from assets impairment disclosed by enterprises did actually reflect on the stock prices in the same period. Yang (2008) examined whether idle assets held by enterprises had moderating effects between assets impairment and enterprise evaluation. The research 78 The Journal of International Management Studies, Volume 9 Number 2, August, 2014

5 findings suggested that a significant negative correlation existed between assets impairment and enterprise evaluation. However, the existence of idle assets did not moderate the effects between assets impairment and enterprise evaluation. RESEARCH DESIGN Taiwan did not announce the financial accounting standard of assets impairment until July As far as enterprises listed in the Taiwan Stock Exchange and GreTai Securities Market are concerned, if assets impairment already existed before the announcement of the standard but no reporting has been made, the impaired assets are subject to depreciation so as to reflect the book value of the assets. However, this approach overlooks the real value of the assets. This study proposes that to revise down the book value of assets which is over-valued after the reporting of assets impairment has negative effects on the operating performance of enterprises. Hypothesis 1: The enterprise evaluation and assets impairment between exists a significant correlation. Given the differences between the characteristics of assets and accounting standards, different categories of assets have varying degree of transparency, thus containing different un-expected information contents. Intangible assets are less transparent than fixed assets due to their own uniqueness and the lack of organized market and financial reports to measure their values. Long-term equity investment evaluated under the equity method only appears in the financial statements as a total number which represents the net assets and profit/loss of the invested company. Its information transparency is even less than a single fixed asset or intangible assets. Therefore, this study draws the following inference: the lower information transparency of long-term assets is, the more information asymmetry occurs between enterprises and investors. The less likely that the market can predict in advance that the asset value is impaired, and the stronger market response will be when assets impairment is announced by enterprise. Hypothesis 2: The stock price response to assets impairment differs according to different categories of long-term assets. In addition, this study proposes that the percentage drop of the stock price in response to the announcement of assets impairment vary according to the characteristics of enterprises or categories of impaired assets. In other words, if investors can project the economic effects of enterprise assets in advance by way of the return on total assets, enterprise scale and liability ratio, then the announcement of assets impairment by enterprises may well be anticipated by the market, leading to smaller percentage drop in stock price. The opposite will lead to larger percentage drop in the stock price. Enterprises of different characteristics will affect the market response before and after assets impairment. This research draws the following inference: if the market is able to project that enterprises with lower return on assets may potentially have unreported loss from assets impairment, the market reaction is relatively weak when these enterprises announce the reporting of loss from assets impairment. The market reaction is relatively strong if the contrary holds. Compared to smaller-scaled enterprises, the cost of collecting information by larger-scale enterprises is more likely to achieve economy of scale. Thus, larger-scale enterprises have higher voluntary disclosure. Furthermore, larger-scale enterprises receive more market attention and investor supervision, and their information disclosure is more complete. Owing to this, a lesser extent of information asymmetry occurs in larger-scale enterprises. The market is more likely to predict in advance whether the asset values are impaired. When enterprises announce assets impairment, the market response The Journal of International Management Studies, Volume 9 Number 2, August,

6 is relatively weak. On the contrary, small-scale enterprises show higher degree of information asymmetry. When enterprises announce assets impairment, the market response is relatively strong. According to the debt covenant hypothesis, enterprises will take accounting measures to increase the net profit to avoid breaching debt covenant. As a result, debt covenant will affect the reporting of assets impairment, further influencing the market expectation as well as percentage change in the stock price. According to the study by Strong and Meyer (1987), assets impairment were related to higher liability ratio. Therefore, this research draws the following inference: if the market can predict that enterprises with higher liability ratio may potentially have unreported loss from assets impairment, the market reaction is relatively weak when these enterprises announce the reporting of loss from assets impairment. The market response is relatively strong if the opposite is true. Hypothesis 3: The assets impairment from different characteristics of enterprises have different market reaction under others remain the same. Empirical model Empirical model 3-1 is constructed based on the purpose of this research as well as the above hypotheses to examine the effects of reporting assets impairment on enterprise evaluation. MVi,t 0 1 TAI i,t i,t (3-1) Where, MV i,t (Market Value): The market value of enterprise i in year t. The first closing price after the submission of financial statements by the enterprise (4/30) multiplied by the outstanding stocks. TAI i,t (Total Assets Impairment): Reported assets impairment by Enterprise i in period t. In addition, model 3-2 is constructed to observe whether different asset categories have moderating effects between assets impairment and enterprise evaluation. MVi,t 0 1OAIi,t 2WAIi,t 3IAIi,t i,t (3-2) Among which, OAI (Ownership Assets Impairment): Ownership method long-assets investment impairment WAI (Working Assets Impairment): Working assets impairment (including impairments of fixed, intangible assets and goodwill) IAI (Idle Assets Impairment ): Impairment of idle assets This research further attempts to study whether the percentage change in the stock price in response to assets impairment varies according to the characteristics of enterprises, such as the return of total assets, and enterprise scale, liability ratio. Empirical model 3-3 is thus constructed. POIR ROA SIZE DEBT (3-3) i,t 0 1 i,t 2 i,t 3 i,t i,t POIR (Price Of Impairment Ratio): Percentage change in the stock price in response to assets impairment = Percentage change in the stock price / Percentage of assets impairment. This represents the percentage change in the stock price in response to announcement of assets impairment which is measured by the market value of stockholders equity. - Percentage change of stock price = (the stock price at the end of April in year t+1 - the stock price at the end of April in year t) / the stock price at the end of April in year t. - Percentage of assets impairment = the reported total loss from assets impairment in year t divided by the market value of shareholders equity at the end of year t. ROA: Return on total assets = Net income after tax / Average total assets SIZE: Enterprise scale = Ln (Stock capital) DEBT: Liability ratio = net liabilities / total assets 80 The Journal of International Management Studies, Volume 9 Number 2, August, 2014

7 RESEARCH SAMPLES AND SOURCE OF DATA Research samples SFAS No.35 was announced on July 1, 2004 in Taiwan which is applicable to all financial statements starting from the accounting period ending on December 31, 2005 (inclusive). However, the standard may be applied ahead of schedule. This research analyzed the financial data of enterprises listed in the Taiwan Stock Exchange and GreTai Securities Market which reported assets impairment between 2005 and However, enterprises in the financial and insurance industries as well as enterprises without complete data were excluded from the research samples. Source of data and statistical, analytical method (1) Financial data: The research samples and related financial data were sourced from Cmoney database, Market Observation Post System and Taiwan Stock Exchange Corporation. (2) Statistical, analytical method: descriptive statistical analysis was first conducted on all variables in this study. After the preliminary results were obtained, correlation coefficient analysis and regression analysis were further undertaken to verify the hypotheses under this research. EMPIRICAL ANALYSIS This study examines the impact of assets impairment on the stock price. Data concerning assets impairment and stock price was taken from Cmoney database. The collected data was between 2005 and The samples were enterprises listed in the Taiwan Stock Exchange, excluding financial, insurance and construction industries. Due to different financial characteristics and accounting measures, enterprises which lacked clear industrial characteristics that were categorized as others were also excluded. During the research period, if part of any enterprise s stock price data could not be obtained, then the enterprise was also excluded. The largest and smallest 0.5% observed values in each year were also eliminated in order to minimize the impact of extreme values on the analytical results. 787 enterprises were selected as research samples with a total of 3,555 company-year observed data. The closing prices of April 30 were used to measure the market value of shareholders equity and the annual stock return. The stock prices were prices after adjustment. Table 1 shows the industry distribution of enterprises which reported assets impairment. Among all samples, more samples which reported loss from assets impairment were in the electronic industry, accounting for 65.69% of the total number of samples. The textile industry accounted for 5.84% of all samples, followed by the chemical industry and electrical industry which accounted for 4.70% and 4.57% respectively. It is clear that Taiwan s enterprises which report assets impairment are mostly in the industries which hold more fixed assets, such as electronic, textile, electrical, chemical, steel and shipping industries. Table 2 sets the Pearson s correlation coefficient between independent variables and dependent variables to obtain empirical results on the degree of correlation between independent and dependent variables. The total amount of assets impairment (TAI) is significantly positively correlated with the market value of enterprise(mv); if the impaired amount is categorized according to the nature of impairments, ownership investment assets impairment (OAI) does not have significant correlation with the market value of enterprise, but working assets impairment(wai) and idle assets impairment(iai) are significantly positively correlated with market value of enterprise. Pearson s correlation coefficient The Journal of International Management Studies, Volume 9 Number 2, August,

8 between enterprise characteristics factors and assets impairment, the asset of return (ROA) is significantly negative correlation but enterprise scale(size) as well as liability ratio(debt)are positively correlation. We conduct a regression by industry and year, the results are shown in Table 3. The adjusted R² in industry shows that the model has significant explanatory power for market value on enterprises reporting assets impairment for all industries. The regression is divided into traditional industries and electronic industries holding larger scale of fixed assets. The coefficient of TAI is positive and significant for all industries, traditional industries t-value is and electronic industry is the market gives positive evaluation on enterprises reporting assets impairment. In addition, we conduct cross-sectional regression for each year in the sample period to assess the consistency of the regression results over time. The adjusted R² in Table 4-3 shows has significant explanatory power for market gives positive evaluation on enterprises reporting assets impairment, t-value are 11.27, 8.14, 9.04, 9.56, 7.40 and respectively 2006 to Given the differences between the category of assets and accounting standards, different categories of assets have varying degree of transparency before the announcement of assets impairment, thus containing different un-expected information contents. Intangible assets are less transparent than fixed assets due to their own uniqueness and the lack of organized market and financial reports to measure their values. Thus, unlike physical assets of plant equipment, their values cannot be inferred from information related to the value of similar assets of another enterprise which shares certain similarities with enterprises owning the said intangible assets (Aboody and Lev, 2000; Chin, Lin, and Hung, 2003). Owing to this, information is less transparent in intangible assets than in fixed assets. Long-term equity investments evaluated under the equity method only appear in the financial statements as a total number which represents the net assets and profit/loss of the invested company. Its information transparency should be less than a single fixed asset or intangible assets. Therefore, this research draws the following inference: impairments of different category of assets will have varying effects on the percentage change in the stock price. The lower information transparency of long-term assets is the more information asymmetry occurs between enterprise and investors. The less likely that the market can predict in advance that the asset value is impaired, and the stronger response of the market will be when assets impairment are announced by enterprise. Table 4 shows the regression output of enterprise value on impairments of different category of assets impairment according to the industry. The whole sample t-values of reported loss from OAI, WAI and IAI are 2.81, and 3.96 respectively. The market response are positively correlated with different category of impairments, they all achieve significant confidence level. The results are consistent if the analysis is based on each year. Large-scale enterprises in the information gathering costs relative to smaller companies with economies of scale, so the larger enterprises whose high level of voluntary disclosure, but also more vulnerable to market more attention and more investors supervision, investors have more complete information on disclosure, so the larger companies announced an asset impairment, stock price reaction magnitude smaller. Debt covenants hypothesis that the net increase in corporate accounting will be taken to avoid violating debt covenants method, which will affect debt covenants recognized asset impairment, thereby affecting the stock market and the expected response amplitude. Therefore, this study can infer the market expected a higher debt ratio prior business may be potentially unrecognized asset impairment loss, when the company announced higher gearing recognized an impairment loss of information, the greater the reaction of the market ( Elliott and Shaw, 1988, Zucca and Campbell, 1992). 82 The Journal of International Management Studies, Volume 9 Number 2, August, 2014

9 Table 5 business economic characteristics factors, such as return on assets (ROA), enterprise scale (SIZE) and liability ratio (DEBT) of the stock price reaction to asset impairment of the regression results by industry analysis. The coefficient of ROA is positive but non-significant for electronics sub-sample, that is, the greater ROA, corporate mention impairment of the larger share price reaction, but were not statistically significant level. High-tech industry, product life cycle is short, the book value of assets often cannot be recovered through use or sale of its follow-up, easy existence falsifying the value of assets, when the greater return on assets, investors are expected to be set aside less impairment losses the amount, therefore, once recognized impairment, the greater the magnitude of the share price reaction (Strong and Meyer, 1987). Test of their size factor for Asset Impairment on stock price reaction in the range of conventional industries sub-sample (t = -4.41) and electronic sub-sample (t = -1.93) for the regression results the coefficient of SIZE is negative and significant for all industries, ie, the larger the enterprise, the enterprise Provision for Impairment of magnitude smaller price reaction. Finally, verification factors on corporate debt ratio of stock price reaction magnitude of impairment in the regression results of non-electron subsample have a positive correlation but have not statistically significant (t = 0.83); electronic sector inversely and statistically significant level (t = -2.63). Inconsistent with debt covenants hypothesis, often high-tech industry has a higher degree of operating leverage, investors are more concerned that compared to the return on assets of the IT industry. However, the traditional industrial is lower operating leverage than high technology industry, debt ratio once large companies also mentioned asset impairment, the natural reaction of investors to the market more strongly. CONCLUSIONS SFAS No.35 took effect on January1, 2005 which was designed to regulate the accounting of assets impairment. The implementation of the standard can better reflect the value of enterprise assets, increasing the transparency of financial statements. The accounting items which are affected by the new standard include fixed assets, idle assets, identifiable intangible assets and long-term investments reported under the equity method. Once it is found that the asset value is less than the future recoverable amount, assets impairment are required to be reported. As a result, the application of SFAS No.35 will inevitably have impacts on accounting earnings, book value of the assets and the stock price. However, when enterprises adjust the asset value more closely to the fair value, finance becomes more transparent which in turn enhances investors confidence. This helps the harmonization between Taiwan s financial statements and the international standards. As far as enterprises are concerned, this change will result in short-term losses but long-term gains. The empirical results show that the market does not hold negative view on the reporting of assets impairment by enterprises, which is consistent with the study by Zucca and Campbell (1992). In other words, investors do not view the reporting of assets impairment as negative information. This research further studies the market response to the reporting of assets impairment by enterprises with different characteristics. In terms of enterprises characteristics, the return of total assets of enterprises and liability ratio is not significantly correlated with the assets impairment report. However, a significant negative correlation exists between enterprise scale and the stock price in response to the reporting of assets impairment by enterprises. Enterprise evaluation by investors is determined by enterprise s real return on total assets rather than the amount of impaired assets. Due to this, this research draws the following inference: investors view the implementation of SFAS No.35 merely as presentation of the value of impaired or idle assets in objective numbers. The primary purpose of the standard is to make financial statements closer to reality, reflecting projected losses in advance. In fact, stockholders The Journal of International Management Studies, Volume 9 Number 2, August,

10 and stakeholders will suffer no loss to their equity. It even serves as a signal of improvement of enterprises future performances which will draw positive evaluation. The reporting of loss from assets impairment is not one of the factors that affect enterprise evaluation. This study uses only financial data to measure the effects of assets impairment on enterprise evaluation without taking into account non-financial data, market risk or economic climate. Future researches may incorporate the above external factors. Table 1: Asset Impairment Industrial Distribution Company Industry Number Percentage (%) Industry Number Percentage (%) Cement Glass& Ceramics Food Paper & Pulp plastics Steel & Iron Textiles Rubber Electric Machinery Automobile Appliance& Cable Transportation Chemical Tourism and Other Non-electron Subsample Electron Subsample Whole Sample Table 2: Pearson Correlation Matrix of Dependent and Independent Variables MV TAI OAI WAI IAI ROA SIZE DEBT MV ** ** 0.07** 0.09** 0.5** TAI 0.21** ** 0.82** 0.09** -0.12** 0.28** 0.05** OAI 0.10** 0.78** ** ** 0.20** 0.05** WAI 0.22** 0.82** 0.30** ** -0.10** 0.025** 0.03* IAI 0.07** 0.09** ** ** 0.07** 0.07** ROA 0.09** -0.12** -0.1** -0.10** -0.05** ** 0.29** SIZE 0.52** 0.28** 0.20** 0.25** 0.07** 0.22** * DEBT ** 0.05** 0.03* 0.07** -0.2** -0.03* Two-tailed test: **significance at 1% level and *significance at 5% level.mv:market Value,TAI:Total Assets Impairment,OAI: Ownership Assets Impairment,WAI:Working Assets Impairment,IAI:Idle Assets Impairment,ROA:Return of Assets,SIZE: Enterprise Scale,DEBT:Liability Ratio Table 3: Summary Statistics from Regression of Market Value on Total Assets Impairments by Industry and yearª MV=α 0 +α 1 TAI i,t +ε i,t Industry α 0 α 1 AdjR 2 F-statistics Non-electron *** Subsample (7.75)*** (16.30)*** Electron *** Subsample (9.59)*** (10.000)*** Year *** (6.13)*** (11.27)*** *** (4.89)*** (8.14)*** *** (6.57)*** (9.04)*** *** (5.56)*** (9.56)*** 84 The Journal of International Management Studies, Volume 9 Number 2, August, 2014

11 *** (5.18)*** (7.40)*** *** (4.22)*** (10.33)*** a Numbers in parentheses are t-statistics (F-statistics for adjusted R²). All t-tests except intercept are two-tailed: ***significance at 1% level, **significance at 5% level and *significance at 10* level. Table 4: The Regression Result of Market Value on Impairments of Different Category of Assets to the Industry and Year a MV i,t =β 0 +β 1 OAI+β 2 WAI i,t +β 3 LAI i,t +ε i,t Industry β 0 β 1 β 2 β 3 AdjR2 Non-electron Subsample Electron Subsample Whole Sample (7.51)*** (10.26)*** (11.38)*** (3.68)*** (91.26)*** (9.32)*** (0.95) (9.43)*** (4.10)*** (45.33)*** (10.96)*** (2.81)*** (12.88)*** (3.96)*** (78.86)*** Year (5.73)*** (9.00)*** (5.42)*** (2.99)*** (49.74)*** (5.05)*** (6.72)*** (7.33)*** (3.67)*** (43.55)*** (6.14)*** (3.20)*** (5.58)*** (4.48)*** (33.78)*** (5.44)*** (3.81)*** (7.91)*** (3.58)*** (34.11)*** (5.04)*** (3.64)*** (5.68)*** (2.17)* (18.85)*** (4.07)*** (4.62)*** (9.26)*** (2.04)* (39.47)*** a Numbers in parentheses are t-statistics (F-statistics for adjusted R²). All t-tests except intercept are two-tailed: ***significance at 1% level, **significance at 5% level and *significance at 10* level.mv:market Value, OAI:Ownership Assets Impairments,WAI: Working Assets Impairments, IAI:Idle Assets Impairments Table 5: The Regression Result of percentage change in the stock price in response to assets impairments on enterprise characteristics according to industry POIR i,t =γ 0 +γ 1 ROA i,t +γ 2 SIZE i,t +γ 3 DEBT i,t +ε i,t Industry γ 0 γ 1 γ 2 γ 3 AdjR2 F Non-electron *** Subsample (4.04)*** (-0.193) (-4.41)*** (0.83) Electron Subsample * (2.43)** (0.06) (-1.93)* (-2.63)** Whole Sample *** (4.32)*** (0.19) (-4.62)*** (0.29) a Numbers in parentheses are t-statistics (F-statistics for adjusted R²). All t-tests except intercept are two-tailed: ***significance at 1% level, **significance at 5% level and *significance at 10* level.poir:price Of Impairment Ratio, ROA:Return Of Assets, SIZE:Enterprise Scale,DEBT:Liability Ratio. The Journal of International Management Studies, Volume 9 Number 2, August,

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