The impacts of asset impairments on performance in the Taiwan listed electronics industry

Abstract

This paper explores whether the recognition of asset impairments provides an opportunity for earnings management by examining changes in the performance. First, we apply a dynamic data envelopment analysis model to evaluate the operating performance of Taiwanese electronics firms for the period from 2004 to 2013. Statistical tests are next applied to assess the average efficiency variation between the periods before and after firms recognise asset impairments. Several empirical findings are as follows: managers recognise asset impairments when their firms have poor performance as compared to other firms that do not record any asset impairments recognition, and that their performance keeps on improving in both the year of recognising asset impairments and the year after asset impairments recognition. That is, managers tend to recognise asset impairments to improve operating performance, while the firms are performing poorly, supporting the opportunistic behaviour theory.

Keywords:

• data envelopment analysis
• dynamic performance
• asset impairments
• earnings management

Notes

1. DMUs of this study are firms in the Taiwanese electronics industry.

2. ATE refers to the average term efficiency or overall efficiency over T terms (t = 1, … , T), while TE is the term efficiency.

3. A value of average efficiency variation more than one suggests that our prediction that firms recognising asset impairment will have better firm performance due to earnings management. In other words, the introduction of Taiwan SFAS No. 35 might bring about more earnings management.