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, Accounting and Management Unit
Ross L. Watts: MIT Sloan School of Management

No 09-106, Harvard Business School Working Papers from Harvard Business School

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 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). Thus, agency theory predicts managers will, on average, use the 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 derived predictions, does not confirm the private information hypothesis.

Pages: 50 pages
Date: 2009-03, Revised 2011-03
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:hbs:wpaper:09-106

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