Asset Impairment Accounting Decisions and Employee Downsizing in Japan

Given the long-term relationship between firms and employees, the literature suggests that managers selectively enhance the informativeness of accounting numbers relating to bad news in anticipation of employee negotiations to inform their employees of the firm’s underlying economics. This study complements and extends the existing literature by investigating whether asset impairment losses play a signaling role in downsizing negotiations and whether variations in employee bargaining power, proxied by employee ownership, lead to different impairment accounting practices during employee negotiations. Specifically, using a large sample of Japanese firms operating in the unique institutional setting of Japan where employee downsizing is difficult to implement, I find that asset impairment loss recognition mitigates the negative relationship between employee ownership and downsizing, suggesting that impairment losses signal firms’ future negative outlooks. Importantly, I also find that downsizing firms with larger employee ownership recognize asset impairment losses earlier around downsizing implementation than those with small employee ownership. Additional analyses suggest that impairment recognition is costly for managers and impairment losses recorded by firms with large employee ownership and employee downsizing reflect economic losses timely, consistent with the informative reporting hypothesis.