Asset Write‐Offs in the Absence of Agency Problems

Abstract

Abstract: Using a large sample of small private companies, we show incremental influence of economic incentives over prescriptions from accounting standards by financial statement preparers in a code‐law setting with high alignment between financial and tax reporting and no agency problems. Contrary to predictions from standards, more profitable companies are more likely to write‐off and the write‐off magnitude is greater, reflecting tax minimisation. Larger companies are more likely to write‐off, but the magnitude decreases with size, reflecting increasing political costs due to greater visibility to tax authorities. Previous write‐off patterns and magnitudes are persistent, reflecting institutional learning linked to regulatory changes.

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