Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/187641 
Year of Publication: 
2015
Citation: 
[Journal:] China Journal of Accounting Research [ISSN:] 1755-3091 [Volume:] 8 [Issue:] 3 [Publisher:] Elsevier [Place:] Amsterdam [Year:] 2015 [Pages:] 147-167
Publisher: 
Elsevier, Amsterdam
Abstract: 
Ideally, firms should discontinue projects that become unprofitable. Managers, however, continue to operate such projects because of their limited employment horizons and empire-building motivations (Jensen, 1986; Ball, 2001). Prior studies suggest that timely loss recognition in accounting earnings enables lenders, shareholders, and boards of directors to identify unprofitable projects; thereby, enabling them to force managers to discontinue such projects before large value erosion occurs. However, this conjecture has not been tested empirically. Consistent with this notion, we find that timely loss recognition increases the likelihood of timely closures of unprofitable projects. Moreover, managers, by announcing late discontinuations of such projects, reveal their inability to select good projects and/or to contain losses, when projects turn unprofitable. Accordingly, thereafter, the fund providers and board of directors are likely to demand improved timeliness of loss recognition and stringent scrutiny of firms' capital expenditure plans. Consistently, we find that firms that announce large discontinuation losses reduce capital expenditures and improve timeliness of loss recognition in subsequent years. Our study provides evidence that timely loss reporting affects 'real' economic decisions and creates economic benefits.
Subjects: 
Timely loss recognition
Conditional conservatism
Agency costs
Corporate governance
Project discontinuations
Accounting quality
JEL: 
G14
G34
M41
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc-nd Logo
Document Type: 
Article

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