The value-relevance of asset write-down regulations in China : the roles of information relevance and measurement reliability

  • Ziyun YANG

Student thesis: MPhil Thesis (Lingnan)


At the end of the 20th century and beginning of the 21st century, China implemented several new asset write-down regulations. This study addresses the claim that these regulations significantly enhanced the usefulness of financial statements for investors in China. The effect of the regulations on usefulness of financial statements has implications for financial accountants, standard-setters, educators, and auditors. This study derives and tests some of the empirical implications of the claim.

I operationalize usefulness of accounting information in terms of the valuerelevance framework, in which information usefulness is construed as a tradeoff between relevance and reliability. These two dimensions are the primary criteria underlying the FASB’s Conceptual Framework for choosing alternative accounting rules. Asset write-down, if correctly applied to over-stated assets, should increase the decision relevance to investors; however, measurement errors due to either unintentional mistakes involving professional judgment or intentional misrepresentations involving earnings management may decrease the reliability of reported amounts. While there is substantial value-relevance research, the role of reliability is generally absent. Reliability of regression estimates, also known as measurement error, is often implicitly assumed and not measured. Following nonnested model selection techniques and relative measurement error research, I explicitly measure the relative reliability of asset write-down accounting in various valuation models. Therefore, this study contributes to value-relevance research.

First, I examine the incremental value relevance of asset write-down estimates through their associations with market values: the ability of asset write-down provisions to explain market value of equity; the ability of asset write-down gains and losses to explain annual market-adjusted return; and the ability of both the above provisions and earnings to explain market value of equity. All the models provide evidence for value relevance of asset write-down estimates, indicating an acceptable level of information usefulness with mixed effects of relevance and reliability. I apply my tests to a balanced panel sample of exchange-listed firms in China over the period 1998-2001. The sample is limited to A shares—the shares subject to the new rules.

Next, the above three valuation models are applied again in a reliability analysis. Model appropriateness tests, i.e. non-nested model tests, are used to answer the question: did asset write-down practices improve reliability in the valuation models? I find that the asset write-down practices are approximately comparable in reliability to historical cost methods in the balance sheet valuation model but somewhat less reliable in the income statement valuation model. The results are ambiguous when both assets and earnings are included in a third valuation model. My relative measurement error tests yield similar results. I conclude that the asset write-down regulations in China have not improved the usefulness of financial statements to investors in terms of reliability.

Because the asset write-down rules are subject to interpretation and judgment, I consider the motivation for write-downs in the final part of the study. The results support a relation between discretionary motivations and the amount of current or cumulative write down. A sub-sample analysis shows that asset write-down rules improve usefulness of financial information in the absence of discretionary motivations.
Date of Award2003
Original languageEnglish
Awarding Institution
  • Lingnan University

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