Does the Asset Impairment Enhance Analyst Forecast Accuracy?

This study examines how the asset impairment affects analysts’ forecasts. Regulatory boards suggest that asset impairment provides useful information in predicting future firm cash-flow, while several studies raise concerns on substantial high flexibility in timing, measurement, and disclosure contents of impairment. We first examine whether analysts’ forecast accuracy and bias for one to three years ahead earning differ in firms with asset impairment when compared to firms without impaired assets. Next, we examine whether analyst forecast accuracy for firms with asset impairment differs after the reinforced regulation with International Financial Reporting Standards (IFRS) adoption. Using the firm-years from 2006 to 2013 listed in Korea, we find evidence that asset impairment charges are related to more optimistic and less accurate analyst forecasts. This result implies that opportunistic recognition for earning management or complexity in measuring impairments may lower informative contents of asset impairment on future earnings. Secondly, we find that the enforced IFRS adoption has no significant impact on the association. These results are robust after controlling for firm characteristics or self-selection bias using Heckman 2 stage or propensity score matching. These findings have valuable implications for users of financial statements including financial analysts and regulators.