Abstract:
In the late '80s and early '90s, writeoffs and writedowns were used by managements to remove non-productive assets from the firms' financial statements. Writedowns allowed the firms to reduce the value of certain assets on the balance sheet, while writeoffs completely removed the assets from the statement. The writeoff/writedown decision is a way to clean up a balance sheet and show improved performance in the long run. The financial markets should reward these companies (in terms of stock price returns), for cleaning up the balance sheet. This hypothesis is tested using an event study regression, and a puzzling behavior is observed. The market does not reward the firm for admitting mistakes, but makes it experience negative returns. However, these results must be interpreted with caution because of the small sample size. Further research with a larger sample including a complete financial ratio analysis may indicate results contrary to those of this study.
