Evidence on the use of unverifiable estimates in required goodwill impairment

Karthik Ramanna () and Ross L. Watts ()
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Karthik Ramanna: Harvard Business School
Ross L. Watts: MIT Sloan School of Management

Review of Accounting Studies, 2012, vol. 17, issue 4, No 1, 749-780

Abstract: Abstract SFAS 142 requires managers to estimate the current fair value of goodwill to determine goodwill write-offs. In promulgating the standard, the FASB predicted that managers will, on average, use the fair-value estimates to convey private information on future cash flows. The current fair value of goodwill is unverifiable because it depends in part on management’s future actions (including managers’ conceptualization and implementation of firm strategy). Agency theory predicts managers will, on average, use the unverifiable discretion in SFAS 142 consistent with private incentives. We test these hypotheses in a sample of firms with market indications of goodwill impairment. Our evidence, while consistent with some agency-theory based predictions, does not confirm the private information hypothesis.

Keywords: Agency theory; Goodwill impairment; Fair-value accounting; FASB; SFAS 142 (search for similar items in EconPapers)
JEL-codes: D82 G38 K22 M41 (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1007/s11142-012-9188-5

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