DP2016-10

Asset Impairment Accounting Decisions andEmployee Downsizing in Japan
Keishi FUJIYAMA
Revised April 10, 2018

Asset impairment accounting decisions and employee downsizing in Japan

Abstract:

Given the long-term relationship between firms and employees, the literature suggeststhat managers enhance the informativeness of accounting numbers in anticipation of employee
negotiations to inform their employees of the firm’s underlying economics. This study complements
and extends the existing literature by investigating whether asset impairment losses play a signalingrole in downsizing negotiations and whether variations in employee influence over firms lead todifferent impairment accounting practices. Specifically, using a large sample of Japanese firms
operating in an environment where employee downsizing is difficult to implement, I find that asset
impairment loss recognition mitigates the negative relationship between employee ownership anddownsizing, suggesting that impairment losses signal firms’ future negative outlooks. In addition,
the results suggest that impairment recognition is costly for managers and impairment losses reflecteconomic losses, consistent with the informative reporting hypothesis. Importantly, I also find that
downsizing firms with strong employee bargaining power recognize asset impairment losses earlier
around downsizing implementation than those with weak employee bargaining power, suggestingthat such an accounting practice by downsizing firms with strong employee bargaining power elicits
concessions from employees.
Keywords: Labor negotiation, Asset impairment, Employee ownership, Downsizing

JEL: G34, J54, M41

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1. Introduction
The purpose of this study is to investigate the signaling role of asset impairment in
employee negotiations. Specifically, I examine whether the recognition of asset impairment losses,
which is identifiable and discretionary accounting, mitigates the adverse impact of employee
bargaining power on employee downsizing, using data from Japanese firms. I also examine whether
firms with strong employee bargaining power are more likely to record impairment losses
before/during a downsizing period than those with weak employees. While prior research provides
some evidence of employee influences on accounting practices (D’Souza et al. 2000; Bova 2013;
Hamm et al. 2017), it provides mixed results regarding accounting practices in the face of labor
negotiations (e.g., Liberty and Zimmerman 1986; DeAngelo and DeAngelo 1991; Osma et al.
2015). 1 In particular, prior research is silent about whether accounting practices in the face of labor
negotiations vary among firms with different levels of employee bargaining power. I fill the void in
the literature by providing evidence on the signaling role of asset impairment and how managers
make use of such a signal in response to different levels of employee influence.
One stream of the literature suggests that managers behave strategically in the face oflabor pressure and/or negotiations. Managers can use financial devices such as cash holding anddebt-equity positions to strengthen their bargaining power in relation to their employees (Klasa et
al. 2009; Matsa 2010). Managers also increase information asymmetry when facing strong labor
unions (Hilary 2006; Chung et al. 2016; Ji and Tan 2016). Another way for managers to enhance1

I use the words “accounting practice” instead of accounting choice to include fair value estimation practicein its definition.

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their bargaining power may be to manage earnings downwards in order to portray negative outlooks
for their firms, which in turn makes it easy to reach agreements that decrease employees’ wealth or
reduced employee pressure (opportunistic reporting hypothesis provided by Liberty andZimmerman 1986).
On the other hand, another line of the literature suggests that given long-term, and hence
cooperative, relationships between firms and their employees, managers do not opportunisticallymanage earnings downward to mislead their employees and enhance their bargaining power, but
inform their employees of real conditions of their firms (informative reporting hypothesis). For
example, Osma et al. (2015) show that negotiation firms report more conservative earnings than
non-negotiation firms, consistent with the informative reporting hypothesis. Taken together, theliterature discusses the two competing hypotheses and it is an empirical question whether accounting
practices are opportunistic or informative in the face of labor negotiations.
This study aims to add new evidence surrounding this debate by examining the effect ofJapanese firms’ asset impairments on employee downsizing. I focus on asset impairment accounting
by Japanese firms for several reasons. First, Japan provides a unique institutional setting toinvestigate employee influences, as a society in which employee downsizing for reorganizational
purposes is difficult due to its social norms and judicially created doctrines. 2 These norms anddoctrines likely facilitate managers of Japanese firms to communicate with employees and convince
them that downsizing is unavoidable. Second, an increasing number of Japanese firms engage in

2

For example, World Economic Forum (2014) points out that the second most crucial obstacle to thecompetitiveness of the Japanese economy is a difficulty with dismissals. Japan is ranked 133 out of 144
countries in the dismissal index.

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employee downsizing. After the collapse of the bubble economy in 1991, Japanese firms haveexperienced long-term stagnation, which is called the “lost two decades”, and have been forced todownsize their employees due to their deteriorating financial position. Thus, Japanese firms
currently operate two contradictory conditions: difficulty in and necessity of employee downsizing,in which accounting numbers can potentially play an important role.
In addition, prior research on both long-lived tangible asset and goodwill impairment
losses reports that firms tend to reform their businesses around the impairment loss recognition(Riedl 2004; Hayn and Hughes 2006), which is consistent with the notion that firms with impairment
recognition operate poorly at least at a cash-generating-unit level. Moreover, it also demonstrates
that managers exercise their discretion to choose the time to record impairment losses, indicatingthat reporting incentives affect managers’ impairment decisions (Riedl 2004; Ramanna and Watts
2012; Fujiyama 2014). Managers can record impairment losses to convey private information incertain circumstances (Gunn et al. 2018). Therefore, Japan provides a unique context that allows me
to explore an accounting role in labor negotiations.
Using a large sample of Japanese firms for the period 2007–2015, I provide several
significant findings. First, building on Atanassov and Kim (2009) suggesting that firms with strong
employee bargaining power are less likely to reduce their workforce, I find that asset impairment
alleviates the negative relationship between employee downsizing and employee shareholdings,
which are a proxy for employee bargaining power. Second, I find that impairment firms are more
likely to experience president turnovers, which are one of the costs managers of impairment firms
incur, negating the possibility of cheap talk by managers (opportunistic reporting hypothesis). Third,4I find that asset impairment losses recorded by firms with high employee shareholdings are morestrongly associated with economic losses that arise one and two years before its recognition thanthose by firms with low employee shareholdings. This evidence suggests that asset impairments are
more informative in firms with strong employees. Finally, I analyze the timing of asset impairment
loss recognition around downsizing implementation, using a sample of firms with both impairment
losses and downsizing. The result show that for those firms with strong employee bargaining power,
managers are more likely to record impairment losses before and/or during downsizing. Combined,
these findings are consistent with the informative reporting hypothesis and highlight the importanceof the signaling role of asset impairment losses for firms with strong employee bargaining power.
This study makes several contributions to the existing literature. First, my study
contributes to prior research on accounting practices around employee negotiations by showing theinfluence of employees on asset impairment practice. While DeAngelo and DeAngelo (1991) andOsma et al. (2015) provide empirical evidence consistent with the informative reporting hypothesis
in labor negotiation settings, their samples are limited to the steel industry in the US, which hasstrong labor unions, and US firms with labor unions, which are organized disproportionately acrossindustries (Bova 2013), respectively. I exploit a strong institutional setting to investigate accounting
practices around labor negotiations and provide large sample evidence that accounting numbers
around labor negotiations are generally informative and managers elicit concessions from
employees through impairment accounting practices. More importantly, I extend prior research byshowing evidence suggesting that impairment accounting practice varies with employee bargaining
power.

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Second, the findings of this study add to the literature on determinants of impairment
recognition inclusive of management compensation and reputation (Beatty and Weber 2006;
Ramanna and Watts 2012), management changes (Riedl 2004), insider trading (Muller et al. 2012),
and debt covenant violation (Riedl 2004; Beatty and Weber 2006; Ramanna and Watts 2012). In
other words, this study extends the literature by providing evidence suggesting that a key stakeholder
group, that is, employees influence impairment recognition. In addition, the result reveals that
impairment recognition causes management turnovers, which in turn provides underlying support
to agency-based non-impairment incentives relating to managers’ wealth.
Third, this study expands the findings of Pinnuck and Lillis (2007) who argue, providing
consistent evidence, that the reporting of an accounting loss acts as a major disciplinary event anda number of outside forces intervene the operations of the firm, including a reduction in workforce.
They call for future research examining how the impact of reporting an accounting loss on
downsizing activities varies across different types of factors of production. I respond to the call andfill the void by focusing on asset impairment including capital investment, which is one of the
production factors Pinnuck and Lillis (2007) point out. This study extends this line of research byfocusing on loss reporting at the segmented level, not the firm-level, and showing how it impacts
on employee downsizing, i.e., the signaling role of asset impairment.
Finally, the findings of this study also have implications for financial statement users. The
results reveal that under strong bargaining power of employees, managers choose the timing ofrecording losses. Impairment loss recognition, in itself, exposes management’s failure ofinvestments. Managers can face trade-offs between accounting communication with investors and6

employees. Therefore, for financial statement users in countries or industries with less flexible
employment or wage systems, it is useful to take labor considerations into account, especially incase of large information asymmetry, i.e., dispersed ownership.
The remainder of this paper is organized as follows. Section 2 describes prior researchand the institutional background, and develops hypotheses. Section 3 documents the research design.
Section 4 presents empirical results, including several robustness checks. Section 5 concludes thepaper.

2. Background and hypothesis development
Prior research
Legal protection for employees and firing flexibility substantially vary across countries(Botero, Djankov, La Porta, Lopez-de-Silanes and Shleifer 2004; World Economic Forum 2014).
Atanassov and Kim (2009) hypothesize and show that managers ally with employees in countries
with strong union laws and protect employees’ job security. However, they find that poorly
performing firms engage in layoffs when their leverage is high even in countries with strong union
laws. Pinnuck and Lillis (2007) suggest that loss reporting is a heuristic trigger for workforce
reduction. Therefore, while firms with strong employee bargaining power face difficulty inimplementing employee downsizing, accounting numbers can play a role in gaining concessions
from employees, i.e., employee downsizing.
In accounting literature, studies have explored how labor consideration shapes financial
statements. Liberty and Zimmerman (1986) hypothesize that managers manage earnings downward7

in anticipation of negotiations with employees (opportunistic reporting hypothesis). However, moststudies fail to find evidence of such accounting practices. Liberty and Zimmerman (1986), using
several unexpected earnings measures, 3 provide no evidence of earnings management duringnegotiation periods, but show negative cumulative abnormal returns (CAR) for negotiation firms ina certain period. One of their interpretations is that managers do not manage earnings downwards
during negotiations because of firms’ poor real operating performance. 4 Subsequent studies also
fail to detect earnings management during labor negotiations (Mautz and Richardson 1992; Cullinan
and Knoblett 1994). Mautz and Richardson (1992) argue that conservative accounting rather thanincome-decreasing accounting choices play a role in the negotiation process.
Several studies, however, provide evidence suggesting that managers make incomedecreasing accounting choices strategically in the face of labor pressure. D’Souza et al. (2000)
investigate accounting choices in the Statement of Financial Accounting Standards (SFAS) No. 106,
Employer’s Accounting for Postretirement Benefits Other Than Pensions, and find that more highly
unionized firms are likely to use the immediate recognition method, which is expected to reducelabor renegotiation costs. They also find that this practice is not the case among firms with higher
debt covenant violation costs, suggesting that firms in financial distress have less incentive tomanage earnings downward. Bova (2013) shows that unionized firms are more likely to missanalysts’ earnings expectations, generally by small margins, partly by managing earnings

3

Specifically, they use three measures of expected earnings: annual earnings in previous years, one obtained
from running regressions with forty quarters’ earnings data, quarterly earnings in the same quarter of theprevious year (i.e., q − 4).
4 Two other interpretations are that unions’ ability to undo the effects of earnings management prevents
managers from implementing such strategies; and that their research methods are insufficient to detect
earnings management at the time of union negotiations.

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downwards. However, he does not provide evidence that suggests an increased likelihood of
expectation-missing practices during negotiation periods. In addition, Hsieh et al. (2017) show thatfirms with labor unions report less conservative earnings, while Leung et al. (2009) find thatearnings become more conservative after firms’ unionization, suggesting that labor union contracts
generate accounting conservatism. Therefore, while prior research suggests labor consideration
affects loss reporting, it does not support the opportunistic reporting hypothesis in negotiation
periods.
On the other hand, Osma et al. (2015) propose an alternative hypothesis, the informative
reporting hypothesis, which states that managers exercise their discretion to inform employees of
their firms’ real economic conditions. Based on repeated game theory (Espinosa and Rhee 1989;
Kahn 1993; Sestini 1999), they argue that firms negotiate with their employees repeatedly, forexample, every three years in the case of wage negotiations in the US, and thus the fact that earnings
management gradually becomes manifest ex post prevents managers to manage earnings for the
purpose of their enhanced bargaining power. The study shows that negotiation firms exhibit lower(more negative) total accruals, indicating income-decreasing behavior in the face of labor
negotiations. The accruals, however, result from conditional conservative accounting rather than
accrual and/or real earnings management. Overall, their results are consistent with the view thatduring labor (or union) negotiations, managers time losses to inform employees of the firms’ realconditions, which convince their employees that renegotiation is needed. Similarly, DeAngelo and
DeAngelo (1991) demonstrate that steel companies in the United States reported lower net income
during union negotiations than during non-negotiation periods. Such lower reported earnings

9resulted from one-time special charges, especially restructuring charges, which managers could
discretionally time to gain concessions from unions. 5
Previous studies are limited in three ways. First, evidence consistent with the informative
reporting hypothesis is provided by studies with limited samples. That is, Osma et al. (2015)
investigate 75 wage negotiations and DeAngelo and DeAngelo (1991) focus on steal industry in the
US. This study uses a larger set of data from broader industries, providing compelling evidence.
Second, the above two studies focus only on industries with strong employees. Bova (2013) showsthat industry determines whether a firm has a unionized employee base in the US. Thus, differencesin accounting practices around labor negotiations among firms with different employee bargaining
power are unclear in the literature. Third, little is known about accounting practices aroundemployee downsizing, partly because prior research focuses on wage negotiations in the US, where
different employment norms prevail.

The Japanese employment system
In a Japanese setting, regardless of employee bargaining power, firms face hardernegotiations than their US counterparts when they implement downsizing. Japanese industrial
relations are characterized by lifetime employment, seniority wage systems, and union-management
consultation, or enterprise labor unions, although these traditional practices have recently become5Some may argue that those losses are opportunistic. However, those losses economically occurred at thetime of their recognition, as explained by DeAngelo and DeAngelo (1991, 18): “For our sample, unusual
items often include one-time special charges that reflect the real restructuring decisions made by sample
managers.”

10less common (e.g., Yamaji 1999; Hamaaki et al. 2012). 6 Lifetime employment, at the core of thesepractices, is defined as a long-term commitment between employers and employees (Ono 2010) andprovides employees with the implicit right to be hired until a certain age stipulated by the firm. It
gradually formed as a social norm in response to the critical labor shortage during the rapid
economic growth in the 1950s and 1960s (Abegglen 1958), and the norm helped to establish thedoctrine of the abuse of rights of dismissal as case law (Moriguchi and Ono 2004).
The favorable aspects of lifetime employment are that it promotes employees’
cooperation and investment in firm-specific skills and enhances employee loyalty to firms (Aoki
1988). Employees’ investments in firm-specific skills, however, result in risks for them. For example,
if a firm’s performance deteriorates, they are forced to transfer to another section, for which thenecessary skills are different from the ones they previously acquired, and to learn new skills, whichis costly for them. Therefore, employees seek to be influential in their firms’ decision making, whichis the case in Japan (Milgrom and Roberts 1992, chapter 10; Aguilera and Jackson 2003).
Reflecting lifetime employment norm, the doctrine of the abuse of rights of dismissal setsfour requirements for collective dismissals: 7 (1) necessity, (2) duty to implement dismissal
avoidance efforts, (3) selection adequacy, and (4) procedural adequacy. The first and forth guidelines

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A seniority-based wage system is one that determines employees’ wages and promotions based on age andtenure in the company. Under a union-management consultation system, managers hold talks with theirunions before making important corporate decisions.
7 Collective dismissal is defined here as employment termination that firms unilaterally propose inaccordance with the doctrine. Note that firms rarely engage in collective dismissals and instead, they propose
voluntary or early retirement programs as dismissal avoidance effort (second requirement). Managers refer tocase laws even in the process of voluntary and early retirement programs to avoid unnecessary lawsuits. The
downsizing measure of this study is assumed to include the effect of voluntary and early retirement programsand thus, I use the words “employee downsizing” in a broader sense than “collective dismissal.” Employment
termination by voluntary and early retirement programs is generally not temporal and supposed to be an
outcome of negotiations with labor unions or employee representatives and/or individual employees.

11are relevant to the present study. Managers are required to demonstrate the necessity of collective
dismissals (first requirement) and set conversations with labor unions or employee representatives(fourth requirement). Thus, accounting numbers can play a role in employee downsizing and theprocess involves employee renegotiations.
Under the social norm and doctrine, Japanese firms have faced difficulty in employee
downsizing for reorganizational purposes during unfavorable economic conditions. This difficulty
is reflected in the ranking of inflexible employment practices published by the World Economic
Forum (2014). Thus, if firms attempt employee downsizing, they need to negotiate with theiremployees regardless of the extent of the employees’ bargaining power. In other words, while
managers of US firms are supposed to have discretion in employment—but not wages—if they makean initial wage contract with unions, and then face wage (re-)negotiations when they perform poorly(DeAngelo and DeAngelo 1991; Osma et al. 2015), managers of Japanese firms are implicitly
supposed to have less discretion in employment, because of the nation’s lifetime employment normand strong anti-dismissal doctrines; and to face employment negotiations even with employees withweak bargaining power, which results in conflict between firms and employees to a greater or lesser
extent.
Downsizing by Japanese firms, however, has been increasingly common since the late
1990s. Because economic downturns in the 1970s and 1980s were short, Japanese firms could
overcome them without downsizing their employees on a large scale. At that time, Japanese firms
avoided downsizing employees by transferring them to other sections or affiliated companies(Moriguchi and Ono 2004). After the collapse of the bubble economy in the early 1990s, firms have12

been forced to reduce personnel due to their fundamentally poor financial health, resulting from theprolonged recession in Japan (Ahmadjian and Robinson 2001; Ahmadjian and Robbins 2005). In
addition, the necessity of downsizing was accelerated by the reduced function of the main banks
and increased ownership by foreign investors, which is characterized as market-based or short-term
interested parties compared with the main banks (Noda 2013).
Currently, Japanese firms operate in two contradictory conditions: higher demand for
employee downsizing and severe difficulties in implementing it. This unique institutional
environment enables me to test the role of accounting practices around employee downsizing.
Furthermore, under reduced capability to protect job security and increased pressure fromshareholders, the incidence of downsizing can be affected by the bargaining power of employees,
and accounting figures can be a means to adjust stakeholders’ interests in this case. Therefore, I
focus on Japanese firms to explore the influence of employees on accounting practices aroundnegotiations between firms and their employees.

Japanese standard for asset impairment
Accounting for asset impairment in Japan, mandatorily effective from the fiscal year
ending in March of 2006, 8 was introduced in the context of the global convergence of accounting
standards for two purposes: setting a standard for asset impairment harmonious with US GAAP andInternational Accounting Standards (IAS) issued by International Accounting Standards
Committee; and providing investors with adequate information about assets, especially those that

8

Early voluntary adoption of the standard is allowed from the fiscal year ending on March 31, 2004.

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have been impaired to a great extent since the collapse of the bubble economy in the early 1990s(Business Accounting Council, 2002). The standard covers all non-current assets such as property,
plant and equipment, and goodwill, with the exception of investment securities, shares and paid-in
capital in affiliates, prepaid pension expenses, deferred tax assets, and revaluation amounts ofdeferred tax assets.
Gordon and Hsu (2018) suggest that recognition and measurement criteria affect thenature of an impairment loss. I explain these aspects of the Japanese standard below. Accounting for
asset impairment in Japan adopts “probability criterion,” which requires impairment recognition
when the probability of asset impairment is sufficiently high. Specifically, impairment test is
conducted when a sign of asset impairment is observed, and then a firm compares undiscounted
cash flows of an asset or a group of assets to its carrying amount. If the later exceeds the former, anasset or a group of assets is recognized as impaired. The signs of asset impairment include
consecutive operating losses or negative cash flows of an asset or asset group, continuance of low
operating rates, substantial changes in business environments, substantial decreases in the price ofan asset or asset group. After the recognition procedure, the amount of an impairment loss ismeasured, using the larger amount of its net realizable value or value in use. Gordon and Hsu (2018)
find that impairment losses under probability criterion are associated with past operating cash flows,suggesting that the firm’s business condition is sufficiently poor at the time of impairment
recognition. Banker et al. (2017) also suggest that asset impairment losses are recorded whenrelatively short-term indicators such as sales and operating cash flows deteriorate.

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As with the US standards for long-lived assets and goodwill impairment (Riedl 2004; Liet al. 2011; Ramanna and Watts 2012), the Japanese standard permits managers to exercise theirdiscretion (Fujiyama 2014). 9 Therefore, certain intentions of managers can be observed byinvestigating the recognition and timing of impairment losses. In addition, impairment loss
recognition involves changes in corporate strategy (Riedl 2004). Because the Japanese standard
employs the “probability” criterion, but not the “economic” criterion, losses are recognized when
impairment indications such as records of operating losses in two consecutive years are observed
and book values of assets exceed estimated future cash flows. In such cases, financial performance
and/or position, at least at a cash-generating-unit or corporate level, is viewed as substantiallydeteriorating. If managers are rational, they are more likely to consider downsizing regardless ofwhether they implement it.

Hypothesis development
When renegotiating with employees as in the case of wage renegotiations in the US,
managers need to persuade employees to gain their concessions. Under the lifetime employment
norm amplified by severe employment case laws, regular employees (seishain) are seen as having
an implicit right to work at a company. Thus, firms’ proposal of employment termination has anature of renegotiation, resulting in the necessity of convincing explanations by managers. Given
that job security is a primary concern to employees, such necessity is stronger for managers facingstronger employee bargaining power. In addition, repeated game theory on industrial relations

9

See Fujiyama (2014) for further previous studies written in Japanese; they show similar results.

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assumes a long-term relationship between firms and employees and suggests that key stakeholders
make concessions to achieve cooperative and efficient outcomes. Therefore, based on theinformative reporting hypothesis, convincing and informative accounting numbers can play a rolein downsizing negotiations.
An asset impairment loss is recorded when a carrying amount of an asset or group of assets
exceeds its recoverable amount. Since a recoverable amount is measured as net realizable value orvalue in use (i.e. sum of discounted future cash flows) according to the Japanese standard, asset
impairment recognition indicates deterioration in performance of a firm or cash-generating unit andsignals its negative future outlooks. As managers with strong employees are less likely to downsize
their employees (Atanassov and Kim 2009), if an asset impairment loss has a signaling role, it
mitigates the negative relationship between employee bargaining power and downsizing. I propose
the following hypothesis:

Hypothesis 1a: Asset impairment loss recognition mitigates the adverse effect of employee
bargaining power on employee downsizing.

However, it might be possible that managers record asset impairment losses as cheap talk to
deceive employees (opportunistic reporting hypothesis). Based on signaling theory, a sender of
information needs to incur costs to make his information credible (Spence 1973). Prior researchsuggests that accounting conservatism plays a signaling role in debt contracting. Zhang (2008) findsthat more conservative firms are more likely to violate debt covenants and enjoy lower interest rates.

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Callen et al. (2016) show that the combined use of accounting conservatism and tighter performancecovenants is associated with lower interest rates in a high information asymmetry regime. Thus,
accounting numbers are more likely to play a signaling role when firms incur costs.
One of the key costs a management team incurs is firm President turnover when firm
performance is deteriorating and restructuring is necessary. 1011 Thus, if an asset impairment loss isa costly signal of a firm’s negative future outlook, firms with such losses are more likely toexperience a President turnover.

Hypothesis 1b: Asset impairment loss recognition is positively associated with firm President
turnover.

The informative reporting hypothesis predicts that accounting practices around employee
negotiations are not only credible but also informative (Osma et al. 2015). In the case of asset
impairment, what is recognized is an existing economic loss that has not been realized in thefinancial statements. If a firm is more likely to signal its negative future outlook by recording asset
impairment losses when its employees have strong bargaining power, such losses are expected toincorporate economic losses that have arisen before their recognition to a greater extent.

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President (shacho) is the top executive of a firm.
Another concession from managers is compensation reduction. However, disclosure of managementcompensation is insufficient in Japan. That is, only a total amount of management compensation paid toboard directors is disclosed and the effect of changes in board directors on their compensation cannot be
adjusted. In addition, a management team often reduces its future compensation and the relationship between
current changes in management compensation and asset impairment loss recognition or employee downsizing
is unclear. Therefore, I focus on President turnover in this study.

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Hypothesis 1c: Asset impairment losses recorded by firms with strong employee bargaining
power reflect economic losses that have arisen before their recognition to agreater extent than firms with weak employee bargaining power..

A natural question that arises from the discussion is that if asset impairment recognition has
a signaling effect, do managers with strong employee bargaining power record such losses in atiming different from those with weak employee bargaining power around downsizing
implementation? Firms with weak employee influences, which are expected to downsize theiremployees more easily, are more likely to hesitate to record asset impairment losses before
downsizing implementation. Large loss recognition worsens firms’ financial position and may
negatively impact on other contracts as in the case of behaviors avoiding debt covenants violationsin impairment literature (Riedl 2004; Beatty and Weber 2006; Ramanna and Watts 2012) as well as
management turnovers discussed above. In addition, it exposes management failure of investments,
which affects shareholders’ evaluation. On the other hand, for firms with strong employees, how
they (re-)negotiate with employees is one of the top priorities. Therefore, firms with strong
employees are expected to record asset impairment losses before/during downsizing implementation
to signal firms’ future outlooks to their employees, while firms with weak employees are expected
to more likely downsize their employees regardless of such losses. This discussion leads to thefollowing hypothesis:

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Hypothesis 2: Impairment firms facing employees with strong bargaining power record
impairment losses earlier around the implementation of employee downsizing
than those facing employees with weak bargaining power.

Osma et al. (2015) argue that publicly disclosed financial statements are a main source offinancial information for labor unions in the US. However, one may raise two related questions: Is
this the case in Japan, where managers and employees have a closer relationship than in the US?
Why is impairment recognition in a downsizing period important, in other words, why do
impairment recognition and downsizing happen during a same period? The nature of information isa spectrum between soft and hard information (Ijiri 1975; Bertomeu and Marinovic 2016). Soft
information is easily pushed in one direction or another; hard information is subjected to averification after which it is difficult to disagree and leaves little room for manipulation. Stocken(2000) argues that given a repeated game, soft information is useful when hard information issubsequently disclosed. Therefore, impairment recognition in financial statements plays a role evenunder a close relationship between managers and employees and hence with private information. In
addition, with private information during downsizing negotiations, impairment losses recorded justafter downsizing implementation are also helpful to maintain firm-employee relationships and it ispossible that impairment losses are recorded just after downsizing implementation.

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3. Research design
Employee bargaining power
To proxy for employee bargaining power in a firm, the percentage shareholding of nonexecutive employee shareholding associations (jugyoin mochikabukai), EmployeeOwnik, isemployed. k denotes year t – 2 or t − 1. In their investigation of US firms, Ben-Ner et al. (2000)
suggest that employees own their firm’s shares when their tenure is longer, the links with their tasks
are stronger, and the skills they acquire are firm specific. Thus, firms with larger employee
ownership establish closer relationship with their employees, and employees in such firms suffer
losses from downsizing because of their investment in firm-specific skills. In addition, previous
studies indicate that firms with relatively large non-executive employee ownership deviate frommaximizing shareholder value (Faleye et al. 2006; Kim and Ouimet 2014). In Japan, executives aswell as part-time and temporary employees are usually ineligible for membership in jugyoin
mochikabukai (Jones and Kato 1995). Thus, the members of employee shareholding associations
are full-time employees, who are protected by Japanese social norms and doctrines. Chizema andShinozawa (2012) use employee ownership in Japan to represent the extent of employee resistance.
Accordingly, I employ the percentage shareholding of employee shareholding associations,
EmployeeOwnik, as a proxy for employee bargaining power in a firm.
Bova et al. (2015) suggest that shareholder employees play the role of shareholders. In
other words, while firms reduce voluntary disclosure in response to employees’ above-market rent
seeking, employee ownership mitigates the effect of this rent seeking, and firms with larger
employee ownership increase voluntary disclosure, consistent with the information demand of non-20

employee shareholders. However, downsizing is different from voluntary disclosure in that once
employees lose their jobs in the firms, it is difficult to recover investments in firm-specific skills
and find better jobs; on the other hand, as in Bova et al. (2015), voluntary disclosure may affectwages, and shareholder employees can alternatively recover above-market rents by maximizing
shareholder wealth in the forms of dividends and capital gains.

Empirical Models
I begin with defining material impairment loss to examine the effect of asset impairment
losses on the negative relationship between downsizing and employee bargaining power and thetiming of asset impairment loss recognition around downsizing implementation. Material asset
impairment loss is defined as occurring when asset impairment losses divided by total assets at theend of fiscal year t − 1 are 1 percent or more. Although this definition is arbitrary, the scale of an
impairment loss is crucial for management to consider a change in strategy and seriously impacts
the firm’s net income. 12 Hereafter, an asset impairment loss is based on the one-percent criterion.
To examine the mitigating effect of asset impairment loss recognition on the negative
relationship between employee bargaining power and downsizing (hypothesis 1a), I run thefollowing logistic regression based on Ahmadjian and Robinson (2001):

12 Elliot and Hanna (1996) employ the one-percent criterion, while Rees, Gill, and Gore (1996) define lossesof less than 0.5 percent of total assets as “immaterial” and exclude such observations from their investigation.
I employ 1 percent as my criterion because Riedl (2004), who investigates long-lived asset impairment losses
in the United States, reports a median write-off amount of 1.3 percent of total assets during the post-SFAS
No. 121 period. While the US standard for long-lived asset impairment employs the principle of materiality,
the Japanese standard does not; and a large number of Japanese firms record impairment losses whose scale isimmaterial, such as 0.1 percent of total assets. These immaterial impairment losses contain less intention.

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𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖 = 𝛼𝛼0 + 𝛼𝛼1 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑖𝑖𝑖𝑖−1 + 𝛼𝛼2 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖+𝛼𝛼3 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑖𝑖𝑖𝑖−1 × 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖 + 𝛼𝛼4 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝑖𝑖𝑖𝑖−1+𝛼𝛼5 𝑇𝑇𝑇𝑇𝑇𝑇10𝑂𝑂𝑂𝑂𝑂𝑂𝑖𝑖𝑖𝑖−1 + 𝛼𝛼6 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖−1 + 𝛼𝛼7 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖+𝛼𝛼8 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑖𝑖𝑖𝑖−1 + 𝛼𝛼9 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑖𝑖𝑖𝑖−1 × 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖 + 𝛼𝛼10 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖−1+𝛼𝛼11 𝑅𝑅𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖−1 + 𝛼𝛼12 𝑅𝑅𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖 + 𝛼𝛼13 𝐶𝐶ℎ𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑖𝑖𝑖𝑖 + 𝛼𝛼14 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖𝑖𝑖−1+𝛼𝛼15 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖𝑖𝑖−1 + ∑ 𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼𝐼 + ∑ 𝑌𝑌𝑌𝑌𝑌𝑌𝑌𝑌 + 𝜀𝜀𝑖𝑖𝑖𝑖(1)

The dependent variable, Downsizingit, is equal to one if a firm experiences permanent
employee reduction of more than 5 percent from year t to t + 1 (two years). This criterion of 5
percent is used by Ahmadjian and Robinson (2001) and Ahmadjian and Robbins (2005). A 5 percent
cut is substantial and should involve major negotiations with employees. While Atanassov and Kim(2009) employ a downsizing measure that takes one if an employee reduction in year t or a period
from year t to year t + 1 is observed, I consider only the latter because the former captures thephenomenon that a firm decreases employees in year t and increases them in the subsequent year
when the former exceeds a threshold and the latter does not. As a robustness check, I obtain similar
results using a measure that includes employee reductions in year t.
DImpit (all) is defined as one if a firm records material asset impairment losses in year t.
It includes all the losses recorded inside and outside Japan. Asset impairment losses recorded outside
Japan may have less influences on employee downsizing in Japan because a cash-generating unit ina foreign country is poorly performing, even though it is also true that firms make strategic changes
considering their global operation. Thus, I also employ an impairment measure, DImpit (Domestic),that takes one if more than 90 percent of a firm’s material asset impairment losses are recorded inJapan.

22

EmployeeOwnit-1 is defined earlier. As Atanassov and Kim (2009) show, employee
bargaining power is expected to have a negative relationship with employee downsizing. As
Hypothesis 1a predicts, I expect the interaction term between EmployeeOwnit-1 and DImpit to bepositive. I also control for other ownership characteristics. ForeignOwnit-1 is percentage ownershipby foreign investors at the end of fiscal year t − 1. Prior research suggests that managers receive
stronger pressure to downsize employees from foreign investors (Ahmadjian and Robinson 2001;
Ahmadjian and Robbins 2005; Noda 2013). The expected sign is positive. Top10Ownit-1 ispercentage ownership by top 10 shareholders at the end of fiscal year t − 1, excluding treasury sharesand ownership by employee shareholding associations.
I define DOmissionit-1 or t as one if a firm experiences dividend omission in year t − 1 or t.
Because employees make concessions when other parties including shareholders do so and dividend
omission, a form of concessions from shareholders, can lead to employee concession, the expected
sign is positive. Sizeit-1 is a natural logarithm of total assets at the end of fiscal year t – 1. Ahmadjian
and Robinson (2001) argue that large firms are more prestigious and believed to be good, stable
employers. Moreover, those firms have more resources to protect employment. Thus, large firms
are expected to less likely downsize their employees. However, if asset impairment loss recognition
has a signaling effect, it may alleviate the reputational effect of firm size. I incorporate theinteraction term between firm size and asset impairment losses.
In addition to firm size, I control for debt ratio (DebtRatioit-1) and return on asset (ROAit1) in year t – 1. These characteristics may affect ownership of a firm. The model also control for

23

concurrent firm performance (ChgSalesit and ROAit) and other factors that may affect downsizing
likelihood (LnAgeit-1 and LnSegmentit-1). 13
To provide corroborating evidence on the signaling role, I examine whether asset
impairment loss recognition leads to President turnovers (hypothesis 1b), following Kang and
Shivdasani (1995, 1997). Specifically, I run the following logistic regression:

𝐶𝐶ℎ𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑖𝑖𝑖𝑖 = 𝛽𝛽0 + 𝛽𝛽1 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑡𝑡 + 𝛽𝛽2 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖𝑖𝑖−1 + 𝛽𝛽3 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖𝑖𝑖−1 + 𝛽𝛽4 𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑖𝑖𝑖𝑖−1+𝛽𝛽5 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑖𝑖𝑖𝑖 + 𝛽𝛽6 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖 + 𝛽𝛽7 𝑇𝑇𝑇𝑇𝑇𝑇10𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑖𝑖𝑖𝑖−1 + 𝛽𝛽8 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑖𝑖𝑖𝑖−1+𝛽𝛽9 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖−1 + 𝜀𝜀𝑖𝑖𝑡𝑡(2)

ChgMGTit takes one if a firm experiences a president turnover from four months after the
fiscal year start of year t (the beginning of August) to four months after the fiscal year end of year t(the end of July). 14 In general, firms hold shareholders’ meetings at the end of three months after afiscal year end (June) and new presidents are appointed in the month (June) or next month (July).
Observing president turnovers with this time period reduces the likelihood of capturing reverse
causality, that is, the fact that new presidents record asset impairment losses to attribute them to past
managers (e.g., Riedl 2004).
Since prior research suggests that CEO characteristics affect turnover, I control forpresident characteristics: age, tenure and percentage shareholding at the end of year t – 1.
LnMGTAgeit-1 is a natural logarithm of president age at the end of year t – 1. The older presidents

13

Byzalov and Basu (2016) suggest that a segment-level change in sales is a good indicator of asset
impairments. However, they use a sample of firms with multiple segments. I do not incorporate the variablebecause my sample includes firms with only a business segment.
14 In annual reports, the date of management appointment is disclosed on a monthly basis.

24are, the higher the likelihood of their turnover is. LnTenureit-1 is a natural logarithm of president
tenure at the end of year t – 1. The longer president tenure is, the higher the likelihood of their
turnover is. MGTOwnit-1 is percentage shareholding by a president at the end of year t – 1. The larger
it is, the smaller the likelihood of their turnover is.
Performance is return on assets or loss reporting. These performance measures are
employed by Kang and Shivdasani (1995, 1997). 15 ROAit is previously defined. Lossit is an indicatorvariable that takes one if a firm report ordinary income losses (keijo sonshitsu) in year t. Other
variables are defined earlier.
To investigate the informativeness of asset impairment losses (hypothesis 1c), I run thefollowing regression, similar to Warfield and Wild (1992) and Lapointe-Antunes, Cormier andMagnan (2009): 16

𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑖𝑖𝑖𝑖 = 𝛾𝛾0 + 𝛾𝛾1 𝑅𝑅𝑖𝑖𝑖𝑖 + 𝛾𝛾2 𝑅𝑅𝑖𝑖𝑖𝑖−1 + 𝛾𝛾3 𝑅𝑅𝑖𝑖𝑖𝑖−2 + 𝛾𝛾4 𝑅𝑅𝑖𝑖𝑖𝑖 × 𝐻𝐻𝐻𝐻𝐻𝐻ℎ𝑖𝑖𝑖𝑖−1+𝛾𝛾5 𝑅𝑅𝑖𝑖𝑖𝑖−1 × 𝐻𝐻𝐻𝐻𝐻𝐻ℎ𝑖𝑖𝑖𝑖−1 + 𝛾𝛾6 𝑅𝑅𝑖𝑖𝑖𝑖−2 × 𝐻𝐻𝐻𝐻𝐻𝐻ℎ𝑖𝑖𝑖𝑖−1 + 𝛾𝛾7 𝐻𝐻𝐻𝐻𝐻𝐻ℎ𝑖𝑖𝑖𝑖−1 + 𝜀𝜀𝑖𝑖𝑖𝑖(3)Equation (3) examines how current and past economic losses are incorporated into asset
impairment losses. NImpairmentit is defined as the negative value of asset impairment losses,
deflated by dividend-adjusted market value of equity at the three months after the fiscal year end ofyear t – 1. Rk is annual buy-and-hold return in year k. k denotes year t – 2, t – 1 or t. Highit-1 is defined

15

They also use annual stock return as a performance measure. In this study, it is not associated withpresident turnovers and does not affect other results.
16 Similar to my model, Glaum et al. (2018) examine the association between goodwill impairment
recognition and stock returns in years t – 1 and t to investigate the timeliness of goodwill impairment
recognition. A timely goodwill impairment can be viewed as informative.

25

as one if a firm's EmployeeOwnit-1 exceeds its sample median. If hypothesis 1c is true, asset
impairment losses recorded by firms with high employee ownership are more strongly associatedwith current and past negative stock returns, that is, economic losses. Thus, the expected sign ofinteraction terms between Highit-1 and stock returns is positive.
To investigate the influence of employees on the timing of impairment loss recognition
around employee downsizing (hypothesis 2), I run the ordered logistic regression as follows:

𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑖𝑖𝑖𝑖 = 𝛿𝛿0 + 𝛿𝛿1 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝑖𝑖𝑖𝑖−2 + 𝛿𝛿2 𝑇𝑇𝑇𝑇𝑇𝑇10𝑂𝑂𝑂𝑂𝑂𝑂𝑖𝑖𝑖𝑖−2 + 𝛿𝛿3 𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑆𝑖𝑖𝑖𝑖−2+𝛿𝛿4 𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝑖𝑖𝑖𝑖−2 + 𝛿𝛿5 𝑅𝑅𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖−2 + 𝛿𝛿6 𝑅𝑅𝑅𝑅𝑅𝑅𝑖𝑖𝑖𝑖−1 + 𝛿𝛿7 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖𝑖𝑖−1+𝛿𝛿8 𝐶𝐶ℎ𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑔𝑖𝑖𝑖𝑖−1 + 𝛿𝛿9 𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑃𝑖𝑖𝑖𝑖 + 𝛿𝛿10 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖𝑖𝑖−2+𝛿𝛿11 𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝑖𝑖𝑖𝑖−2 + 𝜀𝜀𝑖𝑖𝑖𝑖(4)Operationally, I order downsizing implementation (Timingit) as one if a first 5% reductionin employees is observed in year t + 1 compared to the impairment recognition in year t, two in yeart, and three in year t − 1. While some firms engage in downsizing activities over two or threeconsecutive years and Downsizingit in equation (1) considers two years, i.e. year t and t + 1, I takeonly the first reduction into account in constructing Timingit because identifying a downsizing year
is necessary to test impairment timing. If managers face little pressure from employees, they will be
more likely to implement personnel reduction regardless of impairment recognition. On the other
hand, if they face strong bargaining power of their employees, they are expected to be more likely
to downsize their employees after recording the losses, that is, in year t + 1.

26

Ordered logistic regression is appropriate for this analysis because impairment losses areoften recognized in the second half of year t, and the interval between impairment recognition anddownsizing implementation may differ according to the timing of impairment recognition, i.e., yearst − 1, t, and t + 1. I collect impairment recognition timing from interim and annual reports and findthat approximately 70 percent of downsizing firms do not recognize impairment losses in the second
quarter of year t. 17 Therefore, the difference between values 1 and 2 of Timingit represents a different
interval from that between values 2 and 3. Moreover, the dependent variable is limited in terms thatit takes only three values.
Ownership variables are measured in year t − 2 because Timingit considers downsizingsin years t − 1, t, and t + 1. If hypothesis 2 is supported, EmployeeOwnit-2 is negatively correlatedwith Timingit. Top10Ownit-2 is incorporated to proxy for information asymmetry between managers
and shareholders. Recording impairment losses can influence managers' reputations as well as
tenure (Watts 2003; Ramanna and Watts 2012). Lower information asymmetry between managers
and shareholders can mitigate reputation and tenure concerns of managers; thus, managers withstrong information asymmetry may not record impairment losses before implementing personnel
reduction. Top10Ownit-2 is expected to be negatively related to Timingit.
Equation (4) includes control variables similar to equation (1). Sizeit-2, DebtRatioit-2 andROAit-2 are incorporated as factors that affect firm i's ownership as well as firm conditions before
downsizing. Firm performance (ROAit-1, Lossit-1and ChgSalesit-1) and other factors (LnAgeit-2 and
LnSegmentit-2) are also controlled. All these variables are previously defined. PImpairmentit is17

Financial statements in the first and third quarters are not audited as with interim and annual reports; thus,
I investigate only interim and annual reports.

27

defined as the positive value of asset impairment losses, deflated by total assets in year t – 1, which
may influence impairment timing.

Sample selection and data
I start with all firms with financial and price, ownership, and management data fromNEEDS-FinancialQuest, NEEDS-Cges, and Nikkei Kigyo Kihon data, respectively. 18 The sample
consists of only firms whose number of months in a fiscal year is l2 and whose fiscal year ends in
March. 19 Then, I retain firms that adopt Japanese accounting standards. To eliminate the effect ofimpairment losses recorded in year t – 1 on downsizing in year t, firms that record impairment lossesof more than 0.5 percent in year t − 1 compared with total assets at the end of fiscal year t – 2 are
excluded. Finally, I exclude firms whose employee number is more than 200 at the end of year t – 1
to avoid capturing unintended decreases in employees for small firms. 20 Although impairment
losses are included as an independent item in NEEDS-FinancialQuest, some are classified as
restructuring charges. I identify whether restructuring charges contain impairment losses byconfirming annual reports. The final sample consists of 14,757 firm-year observations and I identify
814 firm-years with “material” impairment losses during the period 2007–2015. 21

18

I also validate information on president turnovers from annual reports.
Approximately 70 percent of Japanese firms close their books in March. This procedure can reduce
macroeconomic effects between firms whose fiscal year ends in March and other months.
20 The criterion of 200 employees results in a minimum reduction of 10 employees (5 percent of 200
employees).
21 Although the standard has been introduced mandatorily since March 2006, impairment losses recorded in
the first adoption year included assets impaired during the 1990s. Therefore, I excluded the year to capturefirms’ deteriorating economics.
19

28

Panels A, B, C, and D of Table 1 present descriptive statistics for variables used in thetests, respectively. All the continuous variables are winsorized at the values of 1st and 99th
percentile by year except for the tests of impairment informativeness and timing, where the sameprocedure is conducted for whole the samples. In Panel A, the mean of Downsizingit is 0.1604,
indicating that 16 percent of observations experience employee reductions. This may result from theconsideration of two year downsizing. The means of DImpt (all) and (domestic) are 0.0552 and0.0453. Only a small number of observations record material impairment losses. The mean (median)of EmployeeOwnit-1 is 0.0190 (0.0121). For more than half of observations, employees own a certain
portion of shares of their firm. The means of DOmissionit-1 and DOmissionit are 0.0892 and 0.0918,
respectively, suggesting that dividend payout is important for Japanese firms, consistent with Denis
and Osobov (2008).
<Insert Table1 about here>
Panels A, B, and C of Table 2 present Pearson correlation coefficients for the first, second,and fourth tests, respectively. In Panel A, EmployeeOwnit-1 is negatively correlated with
Downsizingit, consistent with Atanasov and Kim (2009). Interestingly, ForeignOwnit-1 is negatively
correlated with Downsizingit. Prior research suggests that foreign investors are market-oriented andput pressure on poorly performing firms (e.g. Ahmadjian and Robinson 2001). However,ForeignOwnit-1 is also correlated with Sizeit-1 and ROAit-1, suggesting the herding behavior of foreign
investors. Thus, I control for factors that affect firm ownership.
<Insert Table 2 about here>29

Table 3 reports the number and percentage of employee downsizing and impairment
recognition by year. The number of downsizing increases in the years ending in March 2009 and2010. Similarly, the number of impairment recognition increases in the year ending in March 2009.
This is consistent with Fujiyama (2014), who finds that a macro-economic factor, change in GDP,affects asset impairment recognition in Japan. Thus, the sample includes only firms whose fiscal
year end is March to control for macro-economic factors.
<Insert Table 3 about here>

4. Empirical results
Test of a signaling role of impairment recognition in employee downsizing
Table 4 presents the estimation results of equation (1). Column 1 reports the results using
DImpit (all); Column 2 reports those using DImpit (domestic). The coefficients of EmployeeOwnit-1
are negative and statistically significant at the 1% level (coefficient = −9.8415 and −9.8408; z =−4.95 and −4.98 for all and domestic impairments, respectively), consistent with Atanassov andKim (2009). The coefficients of EmployeeOwnit-1 * DImpit are positive and statistically significant
at the 5% level (coefficient = −9.6173 and −10.7023; z = −2.16 and −2.21 for all and domestic
impairments, respectively). In untabulated analysis, I find that the combination of the coefficientsof EmployeeOwnit-1 and EmployeeOwnit-1 * DImpit (domestic) is positive but insignificant(coefficient = 0.8615; z = 0.18). These results suggest that asset impairment loss recognition
moderates the negative effect of employee bargaining power on downsizing, consistent withhypothesis 1a. While Kolasinski and Siegel (2010) argue that an interaction term in a logistic30

regression is interpretable, Ai and Norton (2003) question it. As a robustness check, I compute Aiand-Norton-adjusted interaction effects for interaction terms in equation (1). The interaction effectsof EmployeeOwnit-1 * DImpit are positive and statistically significant at the 1% level (meaninteraction effect = 1.0949 and 1.1628; mean z = 2.86 and 3.21 for all and domestic impairments,
respectively), confirming the main results.
<Insert Table 4 about here>
The coefficient of ForeignOwnit-1 is positive and statistically significant at the 10% and
5% levels in Columns 1 and 2 (coefficient = 0.8255 and 0.8875; z = 1.90 and 2.04), respectively.
This is evidence of foreign investors’ market-oriented pressure on employee downsizing. The
coefficients of Top10Ownit-1 are statistically significantly negative at the 10% level for the models
with all and domestic impairments, respectively (coefficient = −0.4431 and −0.4410; z = −1.88 and−1.87), suggesting that firms with block holders are entrenched due to relationship-based
governance. Sizeit-1 is negatively correlated with Downsizingit (coefficient = −0.2956 and −0.2942;
z = −7.82 and −7.84). This suggests that large Japanese firms are constrained by social norms to agreater extent and that they have more resources to protect job security of employees. Theinteraction terms between Sizeit-1 and DImpit are positive and statistically significant (z = 2.04 and2.01), while Ai and Norton-adjusted mean z indicates statistical insignificance (mean z = 0.83 and1.12). Thus, the results for Sizeit-1 * DImpit is not robust. DOmissionit-1 and DOmissionit are
positively related with Downsizingit at the 1% level (α6 = 0.3124 and 0.3002 and α7 = 0.5062 and
0.5261; z for α6 = 3.13 and 3.01 and z for α7 = 4.93 and 5.14), suggesting that shareholders'concessions likely lead to employees' concessions and thus they cooperate.

31Regarding other control variables, the coefficients of DebtRatioit-1 (z = 2.14 and 2.17) and
LnSegmentit-1 (z = 2.15 and 2.14) are statistically significantly positive; those of ROAit-1 (z = −4.70
and −4.70), ROAit (z = −6.76 and −6.87), and ChgSalesit (z = −10.89 and −10.90) are statisticallysignificantly negative. The coefficients of LnAgeit-1 are negative but insignificant (z = −0.23 and−0.23).
To provide evidence on costly signaling, I report the univariate results of president
turnovers in Table 5. Turnover rates of impairment firms are 18.80 and 19.31 percent for all anddomestic impairment samples, respectively. On the other hand, those of non-impairment firms are
13.28 and 13.31 percent for all and domestic non-impairment samples, respectively. The differences
between impairment and non-impairment firms are statistically significant at the 1% level,
indicating that impairment firms are more likely to experience president turnovers, consistent witha costly signaling explanation.
<Insert Table 5 about here>
Table 6 presents the results estimating equation (2). In Panel A, ROAit is incorporated asa performance measure. The coefficients of DImpit is positive and statistically significant at the 1%
level (z = 5.03 and 4.96 for all and domestic impairments, respectively), consistent with hypothesis
1b. This suggests that impairment recognition causes president turnovers and can be viewed asburdening a cost with management. Regarding president characteristics, LnMGTAgeit-1 (z = 15.42
and 15.40) and LnTenureit-1 (z = 6.66 and 6.67) are positively associated with ChgMGTit; andMGTOwnit-1 is negatively related to it (z = −5.15 and −5.13). The coefficients of ROAit are negative(z = −2.87 and −2.93). DOmissionit is positively related with ChgMGTit (z = 2.97 and 3.03),

32

suggesting concessions among closely related parties. Sizeit-1 (z = −0.50 and −0.39) and DebtRatioit1(z = −0.02 and −0.05) are insignificant. In Panel B, I obtain results similar to Panel A byincorporating Lossit instead of ROAit.
<Insert Table 6 about here>
Table 7 presents the results of impairment informativeness. The sample used in Table 7
consists of only firms recording material asset impairment losses and whose price data are available
from year t − 3. In column 1, baseline results are reported. While Rit is positive but insignificant(coefficient = 0.0205; t = 1.44), Rit-1 (coefficient = 0.0746; t = 4.71) and Rit-2 (coefficient = 0.0564;
t = 4.95) are statistically significantly positive at the 1% level. On average, economic losses in yearst − 1 and t − 2 are systematically incorporated into asset impairment losses. The result of Rit isunderstandable because on average, impairment losses under “probability criterion” are delayed(Gordon and Hsu 2018). 22 In column 2, the difference in impairment informativeness between highand low employee ownership is examined. For both high and low employee ownership firms, theresults are consistent with the baseline analysis. In other words, annual stock returns in years t − 1
and t − 2 are associated with impairment losses in year t, while this is not the case for year t. The
coefficients of Rit-1 * Highit-1 and Rit-2 * Highit-1 are positive and statistically significant at the 10%
level (coefficient = 0.0490 and 0.0461; t = 1.80 and 1.96), suggesting that economic losses areincorporated into impairment losses to a greater extent for high employee ownership firms. This
supports hypothesis 1c.
<Insert Table 7 about here>
22

Consistent with my result, Glaum et al. (2018) find that current period stock returns are not correlated to
the recognition of goodwill impairment in a low enforcement regime for non-financial firms.

33

In sum, the findings suggest that asset impairment loss recognition mitigates the adverse
effect of employee influences on downsizing and that managers of impairment firms incur costs.
The results also indicate that asset impairment losses reflect economic losses to a greater extent forfirms with high employee ownership. Thus, this evidence suggests that asset impairment accounting
is used to signal a firm’s negative future outlook around downsizing to employees.

Test of impairment recognition timing
Table 8 reports the timing of impairment loss recognition around downsizing. The sample
consists of firms that record impairment losses and experience downsizing. In the first row, 31.60
percent of observations record impairment losses before downsizing; so do 40.40 and 28.00 percentof them during and after downsizing implementation, respectively. The second and third rows report
impairment timing for high and low employee ownership firms, respectively. 34.40 percent of highemployee ownership firms record impairment losses before downsizing, while 28.80 percent of
those with low employee ownership do so.
<Insert Table 8 about here>
Table 9 presents the results running ordered logistic regressions. The coefficients of
EmployeeOwnit-2 are negative and statistically significant at the 5% and 1% levels for the samples
including and excluding firms with foreign impairments, respectively (z = −2.19 and −2.74). The
result suggests that firms with higher employee ownership are more likely to record impairment
losses before downsizing, consistent with hypothesis 2, and thus that such firms make use of thesignaling role of an impairment loss to inform employees of their negative future outlooks.

34

Top10Ownit-2 is negatively related with Timingit (z = −1.96 and −1.65), indicating that firms withless information asymmetry with equity investors are more likely to record impairment losses before
downsizing. Private information can reduce the negative effect of impairment recognition on
management reputation. Sizeit-2 is negatively related with Timingit (z = −2.54 and −2.73), suggestingthat large firms also make use of the costly signal to mitigate social pressure. Among performancevariables, only the coefficients of ChgSalesit-1 are statistically significant at the 5% and 1% levels
for the samples including and excluding firms with foreign impairments, respectively (z = −1.96
and −1.98). Other variables are not consistently significant for both samples including and excluding
firms with foreign impairments.
<Insert Table 9 about here>

Robustness checks
To assess the robustness of previous tests, I (1) include additional economic determinantsof asset impairment losses, (2) use data of employee ownership collected from annual report, (3)examine the relationship between forced president turnovers and impairment recognition, (4) use a
different threshold of high employee ownership in the informativeness test, (5) incorporate
additional variables that may influence management incentives to not downsize employees in thetiming test, (6) use different downsizing thresholds in the timing test.

35

First, I include additional variables that affect the recognition of asset impairment losses
into equation (1). 23 24 Lawrence et al. (2013) distinguish non-discretionary from discretionary
conservatism. Since non-discretionary conservatism includes the fact that managers decide to notresist auditors but follow the accounting standard even though they can resist them, it partly reflects
management intention. Thus, I present the results in the previous subsection as main results andfurther examine the mitigating effect of asset impairment on the negative relationship between
employee bargaining power and downsizing by incorporating additional determinants of impairment
recognition. Those determinants are industry-level changes in ROA in year t (ChgIndROAit),changes in earnings in year t (ChgEit), and changes in operating cash flows in year t (ChgCFOit)(Riedl 2004); beginning-of-period Book-to-Market ratios (BTMit-1) (Lawrence et al. 2013);
percentage shareholdings of presidents (MgtOwnit-1) (LaFond and Roychowdhury 2008). 25 I
exclude ROAit because ChgEit is incorporated. The results are presented in Table 10. The coefficientsof EmployeeOwnit-1 * DImpit are positive and statistically significant at the 5% level (z = 2.08 and
2.12; Ai and Norton-adjusted mean z = 2.77 and 3.08), confirming the main results.
Second, I check the robustness of EmployeeOwnik. EmployeeOwnik is collected using the
NEEDS-Cges database. These data are based on questionnaires and annual reports. EmployeeOwnik

23

Different firms employ different depreciation methods for same assets. This fact implies that some firms
do not have carrying amounts of assets that are economically impaired because of accelerated depreciation.
However, it is difficult to identify such firms because even though all the depreciation methods are disclosed,
the disclosure of each method does not correspond to each asset. In addition, goodwill is generally amortizedover 5 years using the straight-line method by many firms because Japanese tax law allows for the inclusionof goodwill amortization as a deductible expense only over 5 years. Thus, it is assumed that firms employ
same depreciation methods.
24 Same variables are incorporated in equation (4). I obtain results providing a same inference as the maintest.
25 I do not include the country-level changes in Gross Domestic Product from period year t – 1 to year t
because the model includes year-fixed effects and this avoids malticollinearity between the changes in GDP
and ChgIndROAit.

36

has a non-zero value if a firm responds to the questionnaire with a maximum disclosure of 30 largest
shareholders, and an employee shareholdings association is ranked in the questionnaire data and/or
annual report. To attenuate the possible bias, EmployeeOwnit-2 is recollected using annual reports, inwhich the 10 largest shareholders are mandatorily disclosed. The results are consistent with those in
the main analyses (untabulated).
Third, I test the likelihood of forced management turnovers. Kang and Shivdasani (1995)
distinguish routine and non-routine management turnovers. If asset impairments pose costs on
managers, an increased likelihood of non-routine turnovers is predicted. I define forced management
turnovers in two ways: first, Forced1it takes one if a president does not stay at the board after the
resignation; second, Forced2it takes one if a president is not appointed as chairman, vice-chairman
or company auditor, or is not given the right of representation. I estimate equation (2) replacing
ChgMGTit with Forced1it and Forced2it. The coefficients of DImpit are positive and statisticallysignificant at the 1% level (coefficient = 0.5833 and 0.5371; z = 4.47 and 3.74 for all and domestic
impairments, respectively) for the regressions using ROAit as performance measure and Forced1it as
dependent variable (untabulated). I obtain similar results when using Forced2it as dependent variable
and/or Lossit as performance measure. The results suggest that impairment recognition causes forced
resignation of presidents.
Fourth, I examine the informativeness of asset impairment losses using a different
threshold of Highit-1. I define High2it-1 as one if a firm’s EmployeeOwnit-1 is higher than the upper
third of it. The results are presented in Table 11. While the coefficient of Rit-1 * High2it-1 turns to be
insignificant (t = –0.13), that of Rit-2 * High2it-1 is statistically significant at the 5% level (t = 2.49).

37

Interestingly, the combination of Rt and Rt * High2it-1 is positive and statistically significant at the
10% level (t = 1.73), although Rt * High2it is insignificant (t = 0.98). The combinations of stock
returns in years t – 1 and t – 2 and High2it-1 are significant (t = 2.58 and 4.11). These results confirm
that impairment losses recorded by firms with high employee ownership are informative.
Fifth, I incorporate into equation (4) additional variables that affect management
incentives to not downsize employees. It is possible that firms that rely heavily on firm-specificknowledge hesitate to downsize employees because it is costly to re-establish firm-specificknowledge bases. For example, Wang et al. (2009) suggest that firms make use of employee
shareholding as a device to promote employees’ investments in firm-specific knowledge. To
mitigate this endogeneity concern of employee ownership, R&D expenditure and employee tenure
are incorporated. R&Dit-2 is defined as R&D expenditure in year t – 2 deflated by sales in t – 2.
LnEmpTenureit-2 is a natural logarithm of average employee tenure at a parent firm level at the endof t – 2. The results are presented in Table 12. Similar to the main results, the coefficients of
EmployeeOwnit-2 are negative and statistically significant at the 5% and 1% levels for all anddomestic impairment samples, respectively (z = –2.05 and –2.66). The coefficients of R&Dit-2 are
negative and statistically significant at the 5% level (z = –2.02 and –2.06), indicating that firms that
rely on firm-specific knowledge are more likely to record impairment losses before employee
downsizing. The coefficients of LnEmpTenureit-2 are negative but insignificant.
Finally, I examine the timing of impairment recognition using different downsizing
thresholds. While Downsizingit captures employee reductions from year t to year t + 1 (two years),
Timingit considers 5% reductions in employees in a year. The magnitude of downsizing may be

38

inconsistent between Downsizingit and Timingit. Thus, I employ 2.5% and 3.75% thresholds for
Timingit. A firm needs to reduce more than 2.5 percent of employees in a year when Downsizingit
takes one and the 2.5% and 3.75% thresholds capture first downsizing in two years. The results are
similar to those in Table 9 (untabulated).

5. Conclusions
In this study, I investigate the signaling role of asset impairment loss recognition decisions
and the influence of employees on the timing of asset impairment losses around employee
downsizing. Prior research provides two competing explanations for accounting practices aroundlabor negotiations: (1) the opportunistic reporting hypothesis that managers manage earnings
downwards in anticipation of employee negotiations and (2) the informative reporting hypothesisthat managers make accounting choices and judgments to inform their employees of the firms’
underlying economics. I shed new light on the debate about the role of accounting practices aroundlabor negotiations by investigating a comprehensive sample of Japanese firms that reflects
substantial variation in employee bargaining power and demonstrating several important findings.
Specifically, I find evidence that impairment recognition mitigates the negative
relationship between employee bargaining power and downsizing and that shareholder concessions,(i.e., dividend omissions) lead to employee concessions. In addition, the results indicate thatmanagers of impairment firms incur costs and that asset impairment losses recorded by firms withhigh employee ownership reflect economic losses to a greater extent. These findings are consistent
with the view that asset impairment losses are a costly and informative signaling device of firms’

39negative future outlooks, further supporting the informative reporting hypothesis. I also test thetiming of impairment recognition and find that firms with higher employee ownership recognize
impairment losses earlier around downsizing implementation than those with lower employee
ownership, suggesting that firms with strong employee bargaining power are more likely to makeuse of such a costly and informative signal. Overall, my findings support the view that accounting
practices around labor negotiations vary with employee bargaining power.
This study also extends prior research on the incentives of impairment recognition.
Previous studies focus on non-impairment incentives such as management reputation and debt
covenant violation. This study sheds light on the opposite aspect, i.e., the incentives for impairment
loss recognition. Third, it extends prior research on the disciplinary role of reporting accounting
losses by investigating how loss reporting at a smaller business unit or an accounting item impacts
on employee downsizing. Finally, the findings of this study have implications for financial statement
users, especially those who are interested in industries or countries with relatively inflexible
employment or wage systems.

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Appendix: variable definitions
Dependent variables
Downsizingit: one if a firm experiences permanent employee reduction of more than 5 percent fromthe end of year t − 1 to the end of year t + 1, and zero otherwise;
ChgMGTit: one if a firm experiences a president turnover from 4months after fiscal year end of yeart – 1 to that of year t.
NImpairmentit: a negative value of asset impairment losses recognized in year t, deflated by
dividend-adjusted market capitalization in three months after fiscal year end of year t – 1;
Timingit: one if a first 5% reduction in employees on an annual basis is observed in year t + 1, twoin year t, and three in year t – 1 compared to impairment recognition in year t.

Independent variables
EmployeeOwnik: the percentage shareholding of non-executive employee shareholding associations(jugyoin mochikabukai) at the end of fiscal year k;
ForeignOwnik: the percentage ownership by foreign shareholders at the end of fiscal year k;
Top10Ownik: the percentage ownership by the 10 largest shareholders at the end of fiscal year k,
excluding treasury shares and employee ownership if ranked as top 10 shareholders;DImpit (all): one if asset impairment losses in year t divided by total assets at the end of fiscal yeart − 1 are 1 percent or more, and zero otherwise;
DImpit (domestic): one if asset impairment losses in year t divided by total assets at the end of fiscal
year t − 1 are 1 percent or more and more than 90 percent of those losses are recorded in Japan,and zero otherwise;
DOmissionik: one if a firm experiences dividend omission in year k, and zero otherwise;
Sizeik: the natural logarithm of total assets in year k;
DebtRatioit-1: total debt divided by shareholders’ equity (jikoshihon) in year t – 1;
ROAik: ordinary income (keijo rieki) in year k divided by total assets at the end of the previous fiscal
year;
ChgSalesik: the percentage change in sales from year k − 1 to k;
LnAgeik: the natural logarithm of the number of years from a firm’s anniversary of foundation to theend of fiscal year k;
LnSegmentik: the natural logarithm of the number of business segments in year k;
LnMGTAgeit-1: the natural logarithm of president age at the end of year t – 1;
46

LnTenureit-1: the natural logarithm of president tenure at the end of year t – 1;
MGTOwnit-1: the percentage shareholding by a president at the end of year t – 1;
Lossit: one if a firm report ordinary income losses (keijo sonshitsu) in year t, and zero otherwise;
Rik: firm i’s annual buy-and-hold return in year k;
Highit-1: a firm’s EmployeeOwnit-1 exceeds its sample median, and zero otherwise;
PImpairmentit: a positive value of asset impairment losses recognized in year t divided by total assets
at the end of year t – 1;
ChgIndROAit: the median change in firm i’s industry return on assets from period t – 1 to t;
ChgEit: a firm’s change in net income excluding impairment losses from year k − 1 to k, deflated bytotal assets at the end of year t – 1;
ChgCFOit: a firm’s change in operating cash flows from year k − 1 to k, deflated by total assets at
the end of year t – 1;
BTMit-1: shareholders’ equity (jikoshihon) deflated by market capitalization at the beginning of yeart;
High2it-1: one if a firm's EmployeeOwnit-1 exceeds the sample’s upper third of EmployeeOwnit-1, andzero otherwise;
R&Dit-2: R&D expenditure in year t – 2, deflated by sales in t – 2;
LnEmpTenureit-2: the natural logarithm of a firm’s average employee tenure at the end of fiscal yeart – 2 for the parent firm.

47

Table 1: Descriptive statistics
Panel A: Variables for the test of the moderating effect of impairment recognition (n = 14,757)
Downsizingt
EmpOwnt-1
ForeignOwnt-1
Top10Ownt-1
DImpt (all)DImpt (domestic)
DOmissiont-1
DOmissiont
Sizet-1
DebtRatiot-1
ROAt-1ROAt
ChgSalest
LnAget-1
LnSegmentt-1

Mean
0.16040.01900.09690.47380.05520.04530.0892
0.091810.91020.18540.05440.05160.02333.96890.7333SD
0.36700.02270.10810.16570.22830.20790.28510.28881.47210.16770.05090.05040.13340.53530.6006Min.
0.00000.00000.00000.10270.00000.00000.00000.00008.04490.0000-0.0897-0.1086-0.5136
1.60940.000025P
0.00000.00000.01090.34660.00000.00000.00000.00009.86730.03540.02250.0214-0.0415
3.80670.0000Median0.00000.0121
0.05680.45820.00000.00000.00000.000010.68520.14860.0446
0.04340.02234.11090.693175P
0.00000.02790.15010.60340.00000.00000.00000.000011.7509
0.29640.07780.07600.08544.2485
1.0986Max
1.00000.11130.49720.87901.00001.00001.00001.000015.2198
0.68690.2886
0.27240.76094.7791
1.9459Panel B: Variables for the test of impairment influence on president turnovers (n = 14,757)
ChgMGTt
LnMGTAget-1
LnTenuret-1
MGTOwnt-1
Losst

Mean
0.13584.09671.52330.02810.0855SD
0.34260.1262
0.94390.06990.2797Min.
0.00003.63760.00000.00000.000025P
0.00004.0431
0.69310.00030.0000Median0.00004.12711.38630.00140.000075P
0.00004.17442.07940.01620.0000Max
1.00004.35673.7136
0.50841.0000Median-0.0569-0.0682-0.1042-0.054175P-0.03220.14670.09020.1527Max-0.0053
1.79661.47702.2179Median2.00000.00880.4436
10.33100.24050.02670.01700.0000-0.0184
0.0212
4.094375P
3.00000.0241
0.5832
11.3383
0.3822
0.05670.04381.00000.05490.04284.2485Max
3.00000.08330.854614.2797
0.67630.35510.24131.00000.59640.19264.8122

Panel C: Variables for the test of impairment informativeness (n = 790)
NImpairmentt
Rt
Rt-1
Rt-2

Mean
-0.1057-0.0188-0.0565
0.0120SD
0.12900.3941
0.34880.4001Min.
-0.7108-0.7469-0.6389-0.594225P-0.1190-0.2659-0.2835-0.2310

Panel D: Variables for the test of impairment timing (n = 250)
Timingt
EmployeeOwnt-2
Top10Ownt-2
Sizet-2
DebtRatiot-2
ROAt-2
ROAt-1
Losst-1
ChgSalest-1
PImpairmentt
LnAget-2

Mean
1.96400.01570.465510.52850.24830.03660.02020.3520-0.01630.03553.9188SD
0.77270.01990.16481.33940.1762
0.06180.05720.47860.15030.03480.6128Min.
1.00000.00000.1326
7.93740.0000-0.0984-0.14850.0000-0.34820.01001.098648

25P
1.00000.00000.34039.54140.08850.0047-0.00410.0000-0.0979
0.01403.7377

Note: Table 1 presents descriptive statistics for the variables used for the main analyses. See theappendix for variable definitions. In Panel B, descriptive statistics for variables reported in Panel A
are not presented.

49

Table 2: Pearson’s correlations
Panel A: Sample for the test of employee influence on downsizing decision (n = 14,757)(1)Downsizingt

(1)
1.000

(2)EmployeeOwnt-1-0.037 1.000(3)ForeignOwnt-1(5)DImpt (all)-0.089 -0.299 1.000-0.013 -0.065 -0.143 1.000
0.117 -0.038 -0.003 0.004

1.000(6)DImpt (domestic)

0.100 -0.027 -0.029 0.012

0.901

1.000

(7)DOmissiont-1

0.190 -0.059 -0.132 0.059

0.054

0.049

1.000

(8)DOmissiont

0.253 -0.059 -0.127 0.051

0.137

0.123

0.689

(9)Sizet-1-0.098 -0.346 0.599 -0.256 -0.032 -0.050 -0.128 -0.115 1.000(10)DebtRatiot-1

0.103 -0.119 -0.096 -0.065 0.059(11)ROAt-1-0.200 -0.041 0.266-0.264 -0.011 0.226-0.214 0.002 0.055(4)Top10Ownt-1(12)ROAt(13)ChgSalest(14)LnAget-1(15)LnSegmentt-1

(2)

(3)

(4)

(5)

(6)

0.054

(7)

0.243

(8)

(9)

(10)

(11)

(12)

(13)

(14)

1.000
0.254

0.200

1.000

0.181 -0.058 -0.053 -0.267 -0.279 -0.037 -0.339 1.000

0.156 -0.097 -0.082 -0.194 -0.318 -0.043 -0.312 0.763 1.000
0.028 -0.056 -0.047 -0.020 -0.143 0.010 -0.017 0.090 0.418 1.000
0.004 -0.103 0.028 -0.266 -0.029 -0.040 -0.025 -0.016 0.186 0.038 -0.235 -0.192 -0.060 1.000
0.011 -0.155 0.107 -0.141 0.023 0.025 0.001 0.002 0.282 0.209 -0.094 -0.079 0.004 0.11150Panel B: Sample for the test of the association between impairment recognition and management turnovers (n = 14,757)
(1)
1.000

(2)

(1)ChgMGTt(2)DImpt (all)

0.037

1.000

(3)DImpt (domestic)

(4)

(5)

(9)

(10)

0.036

(5)LnTenuret-1

0.901 1.000
0.187 -0.052 -0.054 1.000
0.069 -0.005 -0.002 0.144

1.000(6)MGTOwnt-1-0.055 0.034(7)ROAt-0.056 -0.097 -0.082 -0.099 0.065 0.155 1.000
0.045 0.166 0.148 -0.018 -0.002 0.028 -0.498 1.000
0.039 0.137 0.123 -0.029 -0.059 -0.005 -0.318 0.387 1.000
0.030 0.004 0.012 -0.126 0.001 0.225 0.156 -0.025 0.051

1.000(4)LnMGTAget-1(8)Losst(9)DOmissiont(10)Top10Ownt-1(11)Sizet-1(12)DebtRatiot-1(3)0.035 -0.168 0.388

(6)

(7)

(8)

(11)

1.000

0.034 -0.032 -0.050 0.182 -0.152 -0.282 -0.043 -0.076 -0.115 -0.256 1.000
0.024 0.059 0.054 0.019 -0.006 0.009 -0.312 0.101 0.254 -0.065 0.20051Panel C: Sample for the test of impairment timing (n =250)(1)Timingt(2)EmployeeOwnt-2(3)Top10Ownt-2(4)Sizet-2(5)DebtRatiot-2(6)ROAt-2(1)
1.0000

(2)

(3)

(4)

(5)

-0.115 -0.336 -0.154 1.000
0.024 -0.065 0.022 0.049

1.000

(6)

(7)

(8)

(9)

(10)

-0.004 1.000-0.074 -0.060 1.000(9)ChgSalest-1(10)PImpairmentt-0.126 -0.175 0.207 0.062 -0.230 1.000-0.171 -0.117 0.186 0.130 -0.166 0.640 1.000
0.176 0.114 -0.142 -0.219 0.038 -0.389 -0.622 1.000-0.197 -0.083 0.124 0.030 -0.022 0.379 0.504 -0.193 1.000
0.088 0.034 0.018 -0.169 -0.039 -0.120 -0.192 0.256 -0.081 1.000(11)LnAget-2(12)LnSegmentt-2-0.080 -0.204 -0.163 0.279-0.122 -0.090 0.006 0.041(7)ROAt-1(8)Losst-1(11)

0.052 -0.319 -0.169 -0.089 -0.213 -0.081 1.000
0.247 0.067 0.098 -0.119 0.056 -0.113 0.048

Note: Table 2 presents Pearson’s correlations between variables used in the test of hypotheses 1a, 1b and 2. See the appendix for variable
definitions. Bold represents statistical significance at the 5% level.

52

Table 3: The number and percentage of employee downsizing and impairment recognition by year

5% decrease in employee number
from year t to year t + 1

Impairment in year t (all)Impairment in year t (Domestic)

2007/3

2008/3

2009/3

2010/3

2011/3

2012/3

2013/3

2014/3

2015/3

169

298

402

339

305

281

224

169

180

(11.21%) (16.22%) (22.53%) (21.27%) (18.82%) (16.95%) (13.91%) (10.78%) (11.41%)
51

92

155

90

76

93

95

69

93

(3.38%)(5.01%)(8.69%)(5.65%)(4.69%)(5.61%)(5.90%)(4.40%)(5.9%)

46

83

123

84

65

80

68

52

67

(3.05%)(4.52%)(6.89%)(5.27%)(4.01%)(4.83%)(4.22%)(3.32%)(4.25%)

Note: Table 3 presents the numbers and percentage of employee downsizing and impairment recognition by year. The first row reports the number
and percentage of employee downsizing. The second and third rows report the numbers and percentage of impairment firms for all and domestic
impairments, respectively.

53

Table 4: The moderating effect of impairment recognition on the relationship between employee
downsizing and employee ownership
DImpt (all)Constant
EmployeeOwnt-1
DImpt
EmployeeOwnt-1 * DImpt
ForeignOwnt-1
Top10Ownt-1
DOmissiont-1
DOmissiont
Sizet-1
Sizet-1 * DImpt
DebtRatiot-1
ROAt-1ROAt
ChgSalest
LnAget-1
LnSegmentt-1
Year
Industry# of Obs.
Log likelihood
Pseudo R2

Marginal
Coef.
z-statistic
effect1.7529***3.22-9.8415*** -4.95-1.0136-0.9899-1.33-0.07319.6173**2.16
1.09490.8255*1.90
0.0850-0.4431*-1.88-0.0456
0.3138***3.15
0.03570.5050***4.92
0.0608-0.2956*** -7.82-0.0304
0.1344**2.04
0.01010.5045**2.14
0.0520-5.0525*** -4.70-0.5204-7.6119*** -6.76-0.7840-3.4238*** -10.89-0.3526-0.0162-0.23-0.00170.1262**2.15
0.0130DImpt (domestic)
Marginal
Coef.
z-statistic
effect1.7468***3.24-9.8408***-4.98-1.0151-1.2940-1.52-0.0860
10.7023**
2.21
1.16280.8875**2.04
0.0915-0.4410*-1.87-0.0455
0.3014***3.02
0.0342
0.5229***5.11
0.0634-0.2942***-7.84-0.0303
0.1539**2.01
0.01370.5120**2.17
0.0528-5.0507***-4.70-0.5210-7.7364***-6.87-0.7980-3.4300***-10.90-0.3538-0.0166-0.23-0.00170.1259**2.14
0.0130

Yes
Yes

Yes
Yes

14,757-5413.8036
0.166814,757-5421.691
0.1656

Note: Table 4 reports the results by running logistic regressions. The dependent variable,
Downsizingit, takes one if firm i experiences permanent employee reduction of more than 5 percent
from the end of year t – 1 to the end of year t + 1, and zero otherwise. EmployeeOwnit-1 is thepercentage shareholding of firm i’s non-executive employee shareholding associations at the end of
fiscal year t − 1. DImpit (all) [domestic] takes one if firm i’s asset impairment losses in year t divided
by total assets at the end of fiscal year t – 1 are 1 percent or more [and more than 90 percent of thoselosses are recorded in Japan], and zero otherwise. See the appendix for definitions of other variables.
*** **, , and * indicate significance at the 1%, 5%, and 10% levels (two-tailed), respectively. z-values

are based on standard errors clustered by firm. Ai and Norton-adjusted interaction effects for
EmployeeOwnit-1 * DImpit are 1.0949 and 1.1628 and the corresponding mean z are 2.86 and 3.21
for all and domestic impairments, respectively. Ai and Norton-adjusted interaction effects for Sizeit1 * DImpit are 0.0101 and 0.0137 and the corresponding mean z are 0.83 and 1.12 for all and domestic

impairments, respectively.

54

Table 5: Univariate analysis of president turnovers
All impairments

Domestic impairments# of president
turnovers% of president
turnovers# of president
turnovers% of president
turnovers

Impairment firms

153

18.80%

129

19.31%

Non-impairment firms

1,851

13.28%

1,875

13.31%

Chi-squared testp < 0.0000

p < 0.0000

Note: Table 5 reports the univariate analysis of president turnovers. Column 1 includes all firms
recording asset impairments of more than 1% compared to total assets as impairment firm, and in
Column 2, firms are viewed as impairment firm if more than 90% of such impairments are recordedin Japan.

55

Table 6: The influence of impairment recognition on president turnovers
Panel A: Performance is ROAt
Performance = ROAt
DImpt (all)Constant
DImpt
LnMGTAget-1
LnTenuret-1
MGTOwnt-1
Performance
DOmissiont
Sizet-1
DebtRatiot

Coef.

z-statistic-26.7055***
0.4965***5.9220***0.2411***-4.4446***-1.8727***0.2530***-0.0102-0.0046-16.59
5.03
15.42
6.66
-5.15
-2.87
2.97
-0.50
-0.02

Year
Industry# of Obs.
Log likelihood
Pseudo R2

DImpt (domestic)
Marginal
effect0.05730.57600.0235-0.4323-0.18220.0097-0.0010-0.0004

Coef.

z-statistic-26.6843***
0.5368***5.9122***0.2414***-4.4214***-1.9213***0.2582***-0.0080-0.0091-16.58
4.96
15.4
6.67
-5.13
-2.93
3.03
-0.39
-0.05

Yes
Yes

Yes
Yes

14,757-5412.373
0.075914,757-5412.4925
0.0759Marginal
effect
0.06300.57520.0235-0.4302-0.1869
0.0098-0.0008-0.0009

Panel B: Performance is Losst
Performance = Losst
DImpt (all)Constant
DImpt
LnMGTAget-1
LnTenuret-1
MGTOwnt-1
Performance
DOmissiont
Sizet-1
DebtRatiot
Year
Industry# of Obs.
Log likelihood
Pseudo R2

Coef.

z-statistic-26.9598***
0.4854***5.9562***
0.2376***-4.5848***0.2687***0.2309***-0.01140.1125-16.85
4.90
15.59
6.57
-5.34
3.06
2.67
-0.56
0.62

DImpt (domestic)
Marginal
effect
0.05590.58010.0231-0.4465
0.02850.0242-0.00110.0110Coef.

z-statistic-26.9443***
0.5234***
5.9473***0.2378***-4.5653***0.2750***0.2355***-0.00930.1115-16.84
4.81
15.56
6.57
-5.33
3.12
2.73
-0.46
0.62

Yes
Yes

Yes
Yes

14,757-5412.373
0.075914,757-5412.4925
0.0759Marginal
effect0.06130.57940.0232-0.4447
0.02930.0247-0.00090.0109Note: Table 6 reports the results by running logistic regressions. The dependent variable, ChgMGTit,takes one if firm i experiences a change in its president from four months after fiscal year end ofyear t – 1 to that of year t. DImpit (all) [domestic] takes one if firm i’s asset impairment losses inyear t divided by total assets at the end of fiscal year t – 1 are 1 percent or more [and more than 90
percent of those losses are recorded in Japan], and zero otherwise. See the appendix for definitions56

of other variables. *** indicates significance at the 1% level (two-tailed). z-values are based onstandard errors clustered by firm.

57

Table 7: The test of impairment informativeness
Differences between high and low
employee shareholdings firms
Coef.
t-statistic
p-value-0.0743-2.83
0.005
0.01490.90
0.370
0.0544***
3.31
0.001
0.0395***
3.21
0.001

Baseline
Constant
Rt
Rt-1
Rt-2

Coef.
-0.0871***0.02050.0746***
0.0564***t-statistic
-3.16
1.44
4.71
4.95

p-value
0.002
0.151<0.000<0.000Rt * Hight-1
Rt-1 * Hight-1
Rt-2 * Hight-1

0.01400.0490*0.0461*

0.65
1.80
1.96

0.514
0.072
0.050

Hight-1-0.0254***

-2.75

0.006

Year
Industry

Yes
Yes

Yes
Yes

# of Obs.
F-valueadjR2790
2.69***
0.0842790
2.92***
0.1027

Rt + Rt * HighRt-1 + Rt-1 * HighRt-2 + Rt-2 * High0.02890.1034***0.0855***

1.54
4.02
4.01

0.123
<0.000<0.000Note: Table 7 presents the results by running OLS regression. Column 1 reports the baseline resultand Column 2 reports the result of differences between high and low employee shareholdings firms.
The sample includes only firms with asset impairment losses. The dependent variable,
NImpairmentit, is a negative value of firm i’s asset impairment losses deflated by dividend-adjusted
market capitalization in three months after fiscal year end of year t – 1. Rik is firm i’s buy-and-holdannual stock return from three months after fiscal year end of year k – 1 to that of year k. Highit-1
takes one if firm i’s EmployeeOwnit-1 exceeds its sample median, and zero otherwise. See theappendix for variable definitions. *** and * indicate significance at the 1% and 10% levels (twotailed), respectively. t-statistics are based on White-adjusted standard errors.

58

Table 8: Impairment timing
1
79(31.60%)2
101(40.40%)370(28.00%)

Total
250

High employee shareholdings firms

43(34.40%)51(40.80%)31(24.80%)125

Low employee shareholdings firms

36(28.80%)50(40.00%)39(31.20%)125

All firms

Note: The sample consists of firms that record impairment losses and experience downsizing. 1
indicates that firms record impairment losses before employee downsizing; 2 indicates that firms do
so in the year of impairment recognition; 3 indicates that firms do so after employee downsizing.

59

Table 9: The influence of employee ownership on impairment timing

EmployeeOwnt-2
Top10Ownt-2
Sizet-2
DebtRatiot-2
ROAt-2
ROAt-1
Losst-1
ChgSalest-1
PImpairmentt
LnAget-2
LnSegmentt-2
Year
Industry# of Obs.
LR chi2
Log likelihood
Pseudo R2

Sample including foreign impairments
Coef.
z-statistic
p-value-16.0788**
-2.19
0.029
-1.8819*
-1.96
0.050
-0.3112**
-2.54
0.011
1.4924*1.75
0.080-3.0706-0.99
0.322
2.50400.61
0.540
0.22020.56
0.576-2.2974*
-1.96
0.050
2.70150.64
0.524-0.3771-1.23
0.217-0.4715*
-1.94
0.052

Sample excluding foreign impairments
Coef.
z-statistic
p-value-22.8741***
-2.74
0.006
-1.8114*
-1.65
0.099
-0.3938***
-2.73
0.006
1.41451.43
0.153-3.5501-1.05
0.292
3.46670.75
0.451
0.12470.28
0.779-2.7597**
-1.98
0.048
5.75621.16
0.248-0.5120-1.53
0.126-0.4226
-1.53
0.126

Yes
Yes

Yes
Yes

250
84.26***-229.52833
0.1551202
69.40***-185.91661
0.1573

Note: Table 9 reports the results by running ordered logistic regressions. The sample consists offirms that record impairment losses and experience downsizing. The dependent variable, Timingit,
takes one if a first 5% reduction in employees on an annual basis is observed in year t + 1 comparedto impairment recognition in year t; two in year t; and three in year t – 1. EmployeeOwnit-2 is thepercentage shareholding of firm i’s non-executive employee shareholding associations at the end of
fiscal year t − 2. See the appendix for definitions of other variables. ***, **, and * indicate significanceat the 1%, 5%, and 10% levels (two-tailed), respectively.

60

Table 10: Robustness check of the moderating effect of impairment recognition on the relationshipbetween employee downsizing and employee ownership by incorporating additional determinantsof asset impairments
DImpt (all)Coef.

z-statistic

Marginal
effectDImpt (domestic)
Marginal
Coef.
z-statistic
effect1.0728*1.85-10.3639*** -5.18-1.0756-1.2004-1.42-0.0827
10.2310**2.12
1.1646-5.3678*-1.71-0.5571-3.4948*** -4.33-0.3627-4.0219*** -13.66-0.4174
0.47821.29
0.0496
0.2994**2.01
0.0311
1.1422**
1.98
0.1185Constant
1.0972***
EmployeeOwnt-1-10.3530***
DImpt-0.9634
EmployeeOwnt-1 * D_Impt 9.2410**
ChgIndROAt-5.0001
ChgEt-3.4781***
ChgSalest-4.0091***
ChgCFOt
0.4833BTMt-10.2926*
MtgOwnt-1
1.1194*

1.88
-5.14
-1.30
2.08
-1.59
-4.31
-13.62
1.31
1.96
1.94

Controls
Year
Industry

Yes
Yes
Yes

Yes
Yes
Yes

14,757-5413.8036
0.166814,757-5432.9129
0.1639# of Obs.
Log likelihood
Pseudo R2-1.0727-0.07221.0904-0.5181-0.3604-0.41540.05010.03030.1160Note: Table 10 reports the results by incorporating additional variables that determine asset
impairment recognition and running logistic regressions. The dependent variable, Downsizingit,
takes one if firm i experiences permanent employee reduction of more than 5 percent from the endof year t − 1 to the end of year t + 1, and zero otherwise. EmployeeOwnit-1 is the percentage
shareholding of firm i's non-executive employee shareholding associations at the end of fiscal yeart − 1. DImpit (all) [domestic] takes one if firm i's asset impairment losses in year t divided by total
assets at the end of fiscal year t − 1 are 1 percent or more [and more than 90 percent of those losses
are recorded in Japan], and zero otherwise. ChgIndROAit is a median change in ROA in year t forfirm i's industry. ChgEit is firm i's change in net income excluding impairment losses from year t −1 to t, deflated by total assets at the end of fiscal year t − 1. ChgOCFit is firm i's change in operating
cash flows from year t − 1 to t, deflated by total assets at the end of fiscal year t − 1. BTMit-1 is firm
i's Book-to-Market ratio at three months after fiscal year end of year t − 1. MgtOwnit-1 is president
ownership at the end of fiscal year t − 1. ROAit is excluded from equation (1). See the appendix fordefinitions of other variables. ***, **, and * indicate significance at the 1%, 5%, and 10% levels (twotailed), respectively. z-values are based on standard errors clustered by firm. Ai and Norton-adjusted

61

interaction effects for EmployeeOwnit-1 * DImpit are 1.0904 and 1.1646 and the corresponding mean
z are 2.77 and 3.08 for all and domestic impairments, respectively.

62

Table 11: Robustness check of the informativeness test by using an alternative measure of highemployee ownership

Constant
Rt
Rt-1
Rt-2

Differences in impairment informativeness between
high and low employee shareholdings firms
Coef.
t-statistic
p-value-0.0755***
-2.96
0.003
0.01300.80
0.422
0.0732***4.46<0.0000.0383***
3.32
0.001

Rt * High2t-1
Rt-1 * High2t-1
Rt-2 * High2t-1

0.0218-0.0036
0.0659**

0.98
-0.13
2.49

0.329
0.899
0.013

High2t-1-0.0325***

-3.30

0.001

Year
Industry

Yes
Yes# of Obs.
F-value
adjR2790
2.89***
0.1011

Rt + Rt * High2t-1
Rt-1 + Rt-1 * High2 t-1
Rt-2 + Rt-2 * High2 t-1

0.0348*0.0697**0.1043***

1.74
2.58
4.11

0.083
0.01
<0.000Note: Table 11 presents the results by using an alternative indicator variable of high employee
ownership and running an OLS regression. The sample includes only firms with asset impairment
losses. The dependent variable, NImpairmentit, is a negative value of firm i’s asset impairment losses
in year t deflated by dividend-adjusted market capitalization in three months after fiscal year end ofyear t − 1. Rik is firm i’s buy-and-hold annual stock return from three months after fiscal year end ofyear k − 1 to that of year k. High2it-1 takes one if firm i’s EmployeeOwnit-1 exceeds the sample’s
upper third of EmployeeOwnit-1, and zero otherwise. ***, **, and * indicate significance at the 1%, 5%,
and 10% levels (two-tailed), respectively. t-statistics are based on White-adjusted standard errors.

63

Table 12: Robustness check of timing test by incorporating factors that affect management
incentives to not downsize employees

EmployeeOwnt-2
Top10Ownt-2
Sizet-2
DebtRatiot-2
ROAt-2
ROAt-1
Losst-1
ChgSalest-1
PImpairmentt
LnAget-2
LnSegmentt-2
R&Dt-2
LnEmpTenuret-2
Year
Industry# of Obs.
LR chi2
Log likelihood
Pseudo R2

Sample including foreign impairments
Coef.
z-statistic
p-value-15.0808**
-2.05
0.041
-1.8479*
-1.90
0.058
-0.2339*
-1.84
0.066
0.93181.05
0.294-3.9461-1.26
0.209
0.39460.09
0.926
0.19330.49
0.625-2.1856*
-1.84
0.065
1.75070.41
0.683-0.2021-0.58
0.565-0.5780**
-2.32
0.020
-12.7276 **
-2.02
0.044
-0.5403
-1.31
0.191

Sample excluding foreign impairments
Coef.
z-statistic
p-value-22.1727***
-2.66
0.008
-1.9151*
-1.71
0.088
-0.3320**
-2.20
0.028
0.92250.90
0.367-3.9064-1.14
0.252
2.13920.46
0.645
0.17300.39
0.698-3.0254**
-2.14
0.032
4.69830.93
0.354-0.3292-0.86
0.391-0.5891**
-2.03
0.042
-17.4441 **
-2.06
0.039
-0.5089
-1.11
0.269

Yes
Yes

Yes
Yes

250
89.90***-226.70797
0.1655202
74.87***-183.18312
0.1697

Note: Table 12 reports the results by incorporating additional variables that affect management
incentives to not downsize employees and running ordered logistic regressions. The sample consistsof firms that record impairment losses and experience downsizing. The dependent variable, Timingit,
takes one if a first 5% reduction in employees on an annual basis is observed in year t + 1 comparedto impairment recognition in year t; two in year t; and three in year t − 1. EmployeeOwnit-2 is thepercentage shareholding of firm i’s non-executive employee shareholding associations at the end of
fiscal year t − 2. R&Dit-2 is R&D expenditure in year t − 2, deflated by sales in year t − 2.
LnEmpTenureit-2 is the natural logarithm of average employee tenure at the end of fiscal year t − 2
for parent firms. See the appendix for definitions of other variables. ***, **, and * indicate significanceat the 1%, 5%, and 10% levels (two-tailed), respectively.

64