1 - Davi Souza Simon UNIVERSIDADE DO VALE DO RIO DOS SINOS (UNISINOS) - Programa de Pós Graduação em Ciências Contábeis
2 - Clea Beatriz Macagnan UNIVERSIDADE DO VALE DO RIO DOS SINOS (UNISINOS) - Programa de Pos-Graduacao em Ciencias Contabeis
Reumo
This paper investigates impairment practices of Brazilian publicly traded firms conditional on market expectations regarding economic losses. Our analysis is conducted considering Göx and Wagenhofer (2009) model, motivated by the premise that debt contracting is the most important source of demand for impairment rules, following the Ball, Robin, and Sadka (2008) findings, that report that the level of conditional conservatism is shaped by debt markets in the international settings analyzed by the authors.
Our main research problem is the influence of debt on Brazilian firms’ impairment practices. We test debt related hypothesis analyzing the statistical relation between the level of unrecognized economic losses and four debt related variables, the debt to equity ratio, the ratio of short term debt to total debt, the presence of bonds in the companies’ liabilities and the level of debt financing in the year t.
We focus our analysis on the relation between debt and impairment practices, relying on the theoretical model of optimal impairment rules, constructed by Göx and Wagenhofer (2009). We posit that missing impairments could be related to how Brazilian firms utilize debt as a source for financing their projects. The Brazilian debt market is largely dominated by bank credit and with underdeveloped public market for debt. Private lenders (banks) are more likely to have access to private information, to engage in producing information, and renegotiating debt following initial issuance.
We test our hypotheses through dummy variables approach. In our first specification, the dummy variable of interest takes the value 1 when the company has a book-to-market ratio larger than one for the two calendar years, and zero otherwise, following Ramanna and Watts (2012). For our second specification, we test whether the level of unrecognized losses of Brazilian firms is affected by debt related variables.
Our results show that there is a negative relation between the debt-to-equity ratio and the level of unrecognized losses, suggesting that contracting reasons create demand for conditionally conservative accounting. Short term debt is positively associated to the level of unrecognized impairment losses, indicating that the constant monitoring managers are subject to when they have to frequently renegotiate debt substitutes for accounting conservatism. We report evidence that there is an inverted u-shaped relationship between leverage and the level of unrecognized losses.
Our findings highlight the multiple roles that can be played by debt when it comes to understanding the impairment practices of Brazilian firms, as well as the demand for accounting conservatism, which can lead to the development of improved and more generalizable analytical models of accounting conservatism and impairment rules.
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