The effect of covid19 on the discretionary asset impairments in the quarterly report

This paper investigates how the manager's opportunistic attitude toward asset impairment reporting affects quarterly financial statements in Covid19 pandemic situation. The first-quarter financial statements are reported with weak monitoring of accounting information, resulting in managers' opportunistic attitudes. We used discretionary asset impairment losses not the actual asset impairment amount, and the two-way fixed effect panel regression model was used to control the unique characteristics of individual companies. We investigated whether asset impairment losses were underreported in 2020 compared to the other year during the period 2015 through 2020. In addition, we identified under what conditions these effects would be enhanced or weakened. The analysis showed that managers underreported discretionary asset impairment losses in the first quarter of 2020 (hypothesis 1). This result indicates that manager's discretionary propensity to delay impairment loss recognition as much as possible until annual profit is finalized and to report quarterly profit as high has increased due to Covid19. Such a tendency was more pronounced among the firms with higher proportion of overseas assets (hypothesis 2) and was weakened among the firms with larger difference in earnings response coefficient measured by the operating profit and that measured by non-operating profit (hypothesis 3). Finally, firms with income-increasing earnings management in the previous year were insignificantly less inclined to underreport discretionary asset impairment loss during the first quarter of 2020 (hypothesis 4).