Asset Impairments and Tunneling in an Emerging Market

• In Event: Financial Reporting--International Evidence

Abstract

This paper explores how asset write-downs of suspected tunneled firms are used to transfer wealth to controlling shareholders through asset-transfer related party transactions, and consequently, whether the transaction price is related to controlling shareholders’ equity stakes. We hand collect the data on transaction price for asset transfer transactions between firms listed in Hong Kong market and the ownership of controlling shareholders, the results suggest that, for tunneling (measured as the divergence), asset impairments serve as a signal for firms with future asset sales transactions to related parties and a consequence for firms with prior asset acquisitions. Further, we find that firms with forthcoming asset-sales related-party transactions and firms with more asset write-downs recognize more income-decreasing accruals and engage in downward earnings management. The results provide policy implications to mandatory disclosure of related party transactions in Hong Kong.

Author

• Hua Lee, Hong Kong Shue Yan University