Infección experimental

The seminal work by Francis et al. (1996) posed two opposite views on the managerial discretion in recording assets impairment losses. Most of the following research was dedicated on understanding whether the assets impairment losses are guided either by earnings management purposes or by the objective to provide reliable information to the markets. Several studies found evidence that the asset write-offs are associated to managerial incentives like big bath, income smoothing, debt contracting, or CEO changes (Francis et al., 1996; Riedl, 2004; Beatty and Weber, 2006; Zang, 2008). Other studies found evidence that the asset write-offs are appropriate responses to changes in the firms’ performance and economic environment, like declines in profitability or declining macro-economic trend (Rees et al., 1996; Godfrey et al., 2009; Jarva, 2009).

A common feature of this literature is the consideration of the impairment losses as either entirely opportunistically determined or entirely credible information. Unlike this literature, I follow the work by Chao and Horng (2012) in partitioning impairment losses into an expected non-discretionary portion and a discretionary portion. The non-discretionary portion captures the expected loss given a set of economic factors like the firm performance and growth opportunities, the industry performance and the macro-economic trend. The discretionary portion captures the impairment loss manipulation, either downward or upward, and its overall magnitude can be influenced by managerial reporting incentives. The lower is the magnitude of the discretionary impairment losses, the more reliable is the asset write-off information disclosed. I investigate if ownership and corporate governance influence the discretionary portion of the impairment losses, across different governance environments.

Insider ownership !

The academic literature provides alternative views on the impact of insider ownership (ownership by corporate founders, controlling family members, managers, sitting in the board) on the accounts manipulation. One view is that low insider ownership implies poor alignment of interests between shareholders and managers

(Jensen and Meckling, 1976; Fama and Jensen, 1983). To mitigate agency conflicts, contractual constrains are used, often incorporating accounting-based restrictions on the managerial actions (e.g. debt covenant, bylaws, compensation rules). Corporate management may attempt to adjust accounting numbers to relieve such behavioural constraints (Watts and Zimmerman, 1986; 1990; Warfield et al., 1995). Prior literature found evidence of the management’s opportunistic behaviour, such as accrual manipulation, to increase earnings-based compensations, relax contractual constraints or avoid debt covenants (Holthausen et al., 1995). In this perspective, high insider shareholding implies a convergence of interests between insiders and outsiders shareholders (Leftwich et al., 1981; Fama and Jensen, 1983). This convergence of interests reduces the incentive for managers-shareholders to avoid behavioural constraints. Accordingly, prior literature found evidence of lower magnitude of accounts manipulation in companies with high insider ownership (Warfield et al., 1995).

Alternatively, greater insider ownership can result in entrenchment by directors/shareholders and lack of market discipline (Morck et al.,1988; Dyck and Zingales, 2004; Cornett et al., 2008). Insider shareholders may engage in the search for a trade-off between profits and private benefits (Morck et al., 1988). Insiders can try to maximize their own welfare and expropriate wealth from other investors as well as from other stakeholders, i.e. the employees (Fama and Jensen 1983; Shleifer and Vishny, 1997). The entrenchment hypothesis predicts opportunistic behaviour detrimental to the outside shareholders’ interests, including extraction of private rents, compensation schemes, related party-transactions, accounts manipulation (Claessens et al. 2000; DeAngelo and DeAngelo 2000; Faccio et al. 2001; Anderson and Reeb, 2004; Dyck and Zingales, 2004).

Following prior literature, I expect that the entrenchment effect will overcome the alignment effect with regard to the manipulation of impairment losses, due to the nature of the insider shareholders concern. Ramanna and Watts (2009) suggest that equity-asset-pricing concern is a key factor influencing impairment manipulation. The accounting choices may take into account, or even try to influence, the stock prices (Fields et al., 2001; Ramanna, 2008). Insiders may be concerned that assets write-offs directly map into stock prices, affecting their own wealth (Ramanna, 2008). The higher insider shareholding is, the greater would be the concern about the effect of asset write-offs. In this situation, insider shareholders may be tempted to put

private benefits ahead of market discipline (Morck et al., 1988; Claessens et al. 2000; DeAngelo and DeAngelo 2000; Faccio et al. 2001; Anderson and Reeb, 2004; Dyck and Zingales, 2004). The equity-asset-pricing concern can thus lead to more discretionary impairment losses.

Also, at high level of ownership, insider shareholders are more likely to have a long tenure as directors and to be responsible for the original acquisition decision of the impaired assets (Beatty and Weber, 2006; Ramanna and Watts, 2009). Since the impairment may suggest that the acquisition price was too high, reputational concern may be added to the equity pricing concern, leading to more discretionary assets write-off (Francis et al., 1996; Beatty and Weber, 2006; Ramanna and Watts, 2009). Given the abovementioned considerations, I formulate the following hypothesis.

Hypothesis 1: Ceteris paribus, insider shareholding is positively associated to the magnitude of discretionary impairment losses.

(

State ownership !

State-owned firms are de facto under the control of politicians (Shleifer and Vishny, 1997). The key objectives of politicians can diverge from those of external investors and be different from the overall aim of maximizing the firm-value (Shleifer and Vishny, 1994; Huyghebaert and Wang, 2012). The influence of state ownership over financial reporting can be explained basing on two broad views.

The first view can be based on the political theories of North (1990) and Olson (1993), who generally argue that the primary objectives of politicians are staying in power and managing wealth (Shleifer and Vishny, 1994; Bushman and Piotrovskij, 2006). Through the control of enterprises and banks, the politicians may provide employment, subsidies and other benefits to supporters and cronies, who in return provide votes and other contributions, including bribes (La Porta et al., 2002; Bushman and Piotroski, 2006). Bushman et al. (2004) hypothesize that state-owned companies conceal firm specific information to hide expropriation activities by politicians and their cronies. Using a global sample, the Authors find that high state ownership of enterprises and banks is associated with reduced financial transparency. If politicians are interested in concealing the firms’ performance and overall financial situation, than the manipulation of the impairment losses can be part of their obfuscation activity.

The second perspective advocates a benevolent view of the state (Gerschenkorn, 1962; Shleifer, 1998). This view argues that government ownership of firms can play a crucial development role, ensure general welfare, or deal with market imperfections, such as externalities (Shleifer, 1998). Even from a “benevolent” view of the state ownership, the pursue of public interest by politicians could be again detrimental to the external investors interests. Politicians may be more concerned by unemployment than by the firm-value maximization (Shleifer, 1998; Ding et al., 2007; Huyghebaert and Wang, 2012). Also, politicians can sponsor local suppliers or keep afloat state-owned firms with financial difficulties (Huyghebaert and Wang, 2012)147_{. These circumstances can lead to impairment losses manipulation, to avoid} the economic and market implications of such write-offs.

Both views on the politicians control of firms lead to the hypothesis that state ownership is associated to an increased magnitude of discretionary impairment losses.

Hypothesis 2: Ceteris paribus, state ownership is positively associated to the magnitude of discretionary impairment losses.

Institutional investors ownership !

Institutional investors have the financial ability and the incentives to be more informed and to exercise stricter control over the firms’ performance (Schipper, 1989; Pound, 1992; El Gazzar, 1998; Koh, 2003). Large investors ownership makes option exits more expensive, given the significant discounts related to large share sales (Black and Coffee, 1994; Rajgopal and Venkatachalam, 1998). This implies that as the institutional investors shareholding increases, the cost of being less informed or inactive becomes more relevant (Pound, 1992), whilst the costs of monitoring and being better informed can lower by sharing those activities among joint groups of investors (Hand, 1990; Utama and Cready, 1997; El-Gazzar, 1998; Koh, 2003). Accordingly, the presence of such sophisticated market participants is !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

147 _{The usage of a listed firm as tool to implement public policies is well embodied by the Petrobras} case (Economist, 2012). Petrobras and its suppliers account for the 10% of the Brazilian GDP. Petrobras choices, such as the use of local highly expensive suppliers, instead of much cheaper imports, are driven by the state owner. Such choices benefits the local economy in the short term, but are against the interests of the other shareholders (and probably of Brazil in the long term as the Petrobras CEO argues). http://www.economist.com/news/americas/21566645-how-gra%C3%A7a- foster-plans-get-brazils-oil-giant-back-track-perils-petrobras

found to be associated to overall higher quality financial reporting, i.e. reduced earnings management, higher disclosure quality (Bushee, 1998; Bradshaw et al., 2004; Leuz and Wisocki, 2008).

Besides the active control attitude, institutional investors tend to buy stocks in companies whose financial reporting is already believed to have a good level of reliability and quality. So, their presence can be expected in companies with more reliable accounting information (Bushee and Noe, 2000; Leuz and Wisocki, 2008). Given the abovementioned considerations, I expect that the institutional investors shareholding is negatively associated to the manipulation of impairment losses, as a result of the greater attention paid by such sophisticated market participants to quality financial reporting, as well as of the stricter control exercised over the financial information. I formulate the following hypothesis.

Hypothesis 3: Ceteris paribus, institutional investors ownership is negatively associated to the magnitude of discretionary impairment losses.

Corporate governance

!

Corporate governance is a fundamental device to monitor the managers’ opportunistic behaviour. As already said in other parts of this thesis, a key aim of corporate governance is to help investors by aligning the interest of the managers with those of shareholders, as well as by ensuring that reliable information about the company’s performance is released to the outside (Watts and Zimmerman, 1986; Fama and Jensen, 1983; Dechow et al., 1996).

Academic’s literature prevailing view is that stronger governance mechanisms ensures reliable financial reporting and limit accounts manipulation by managers (Dechow et al., 1996; Core et al., 1999; Klein, 2002; Xie et al., 2003; Karamanou and Vafeas, 2005; DeFond et al., 2005; Gu and Lev, 2011). Empirical research found evidence of several governance mechanisms effective in enhancing the financial reporting quality and constraining accounts manipulation, such as: higher proportion of independent directors in the board (Dechow et al., 1996; Beasley, 1996; Peasnell et al., 2005; Cornett et al., 2008); separation of Chairman and CEO roles (Dechow et al., 1996; Cornett et al., 2009); board and audit committee meeting frequency (Xie et

al., 2003; Karamanou and Vafeas, 2005; Ebrahim, 2007; Cornett et al., 2009; Allegrini and Greco, 2013).

Following this stream of literature, I expect that in weakly governed firms the level of discretionary impairment losses will be higher and vice versa. I formulate the following hypothesis.

Hypothesis 4: Ceteris paribus, stronger governance mechanisms are negatively associated to the magnitude of discretionary impairment losses.

3.1.3. Research( design:( sample( selection,( ownership( structures,( corporate(