Does Impaired Loss Accounting Affect Firms' Investment? Evidence from Japan

Author Name UESUGI Iichiro (Faculty Fellow, RIETI) / NAKAJIMA Kentaro (Hitotsubashi University) / HOSONO Kaoru (Gakushuin University)
Creation Date/NO. April 2017 17-J-033
Research Project Study on Corporate Finance and Firm Dynamics
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First draft: April 2017
Revised: July 2019


Asset impairment accounting is a procedure that allows an abrupt decrease of a firm's asset value in case of severe damage. When impairment of the asset occurs, the firm has to decrease its value in the balance sheet and recognize a loss in the income statement. In Japan, many policymakers argued that enforcing such an accounting procedure during a period of severe economic downturn would decrease firms' collateral value and further deteriorate their procurement environment. In contrast, a number of theoretical and empirical studies emphasize the positive aspects of this accounting procedure. This paper examines these arguments by investigating the impact of the introduction of fixed asset impairment accounting on their capital investment and land transactions to find the following. First, there exists no significant difference in the capital investment and land purchases between firms that reported impaired asset losses and those that did not. Second, there exists no significant difference in the way unrealized asset losses affect capital investment between both sets of firms. Third, the land sales ratio is higher among firms that reported impaired losses, especially when they have increased their profit. The result is consistent with the firms'motivation to decrease their taxable income by selling land and realizing the capital losses once they have impaired losses in their balance sheets.