Earnings’ Ability to Predict Future Operating Cash Flows
Previous studies related to asset write-offs present different views about the consequences of managerial discretion over reporting on the informativeness of the financial statements. Rees, Gill, and Gore (1996) argue that managers use their discretion to provide a valuable signal to investors. The authors assume that, if firms want to manipulate earnings through an asset write-off, firms may also use their
discretion over operating accruals. Consistent with their predictions, the authors find that asset write-offs are accompanied by income decreasing operating accruals during the same period. Based on the findings that the operating accruals are not reversed in following years, they conclude that the write-off is not a result of opportunistic managerial behavior but a credible signal to the market regarding firm value.