Cognitive Dissonance as an Explanation of Goodwill Write-Offs

Sohyung Kim and Darlene Bay

Journal of Behavioral Finance, 2017, vol. 18, issue 1, 14-28

Abstract: While agency theory has been an important part of accounting academic research, many researchers have suggested that other theories should also be considered. One such theory is the theory of cognitive dissonance. In this study, the authors develop competing hypotheses based on agency theory and the theory of cognitive dissonance regarding the decision to record an impairment of goodwill. Using an archival research methodology, they test the hypotheses on a sample of 2,274 firm-year observations. The results are consistent with the theory of cognitive dissonance even after controlling for variables that have been found to be significant under agency theory. The authors conclude that there is strong evidence to suggest that agency theory does not uniquely explain the results of management decisions as seen through financial reporting data.

Date: 2017
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DOI: 10.1080/15427560.2017.1274755

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