| HBS Working Paper Series
Evidence from Goodwill Non-impairments on the Effects of Unverifiable Fair-Value Accounting
SFAS 142 requires firms to use unverifiable fair-value estimates to determine goodwill impairments. Standard setters suggest managers will use the discretion given by such estimates to convey private information on future cash flows, while agency theory predicts managers will use the discretion opportunistically. We test these alternative hypotheses using a sample of firms with market indications of goodwill impairment (firms with book goodwill and two successive years of book-to-market ratios above one). We find non-impairment of goodwill is increasing in firm characteristics predicted to be associated with greater managerial discretion. We also find evidence that the discretion is being used in a manner consistent with agency-based predictions. The evidence does not confirm managerial discretion is being used to convey private information.
Keywords: Fair Value Accounting;