Inventory write downs in the semiconductor industry
Description
We study the motives for, and implications of, managerial discretion in inventory valuation. The semiconductor industry—characterized by rapid technological change, frequent product obsolescence, and continual declines in output prices—provides an ideal context to examine managers’ decisions regarding inventory write-downs and production. In this setting, we develop a measure of excess inventory and find that inventory write-downs are strongly correlated with this measure. We also find evidence that managers strategically time inventory write-downs during periods of poor performance, consistent with “big bath” reporting incentives. Furthermore, we construct a proxy for abnormal write-downs and find that it is positively associated with subsequent operating performance and negatively associated with future write-downs. This suggests that such discretionary actions may help firms reset expectations and improve future financial outcomes. Interestingly, our results indicate that neither analysts nor investors fully incorporate the predictable implications of abnormal write-downs when evaluating firms’ future performance.
Copyright Date
January 2010
Publication Date
1-1-2010
Keywords
Electronics industry, Semiconductor industry, Inventory, Earnings management
Conference
Accounting Research Conference, 19-20 December, 2010, Indian School of Business, Hyderabad
