Macroeconomic Factors and Financial Statements: Asset Writedowns during Recessions

I examine the asset writedown decisions of firms during recessions. These decisions are jointly determined by a decline in asset value and by managers' reporting incentives, both of which are affected in recessions. I find that sales declines in recessions have an incremental effect on asset writedowns of procyclical firms and financially constrained firms-firms that are sensitive to business cycles. The pervasive nature of recessions leads to an incremental effect of writedowns by procyclical firms and industry leaders in the previous quarter on writedowns by other firms in recessions. Finally, I find that while the probability of writedowns decreases for highly levered, weak firms in recessions-firms less likely to get covenant violation waiver - it increases for highly levered, strong firms. The key implication of my results is that it is essential to incorporate the broader context in which accounting choices are made when evaluating managers' reporting decisions.