Title: Management discretion and the role of the stock market in goodwill impairment decisions - evidence from Finland

Authors: Jani Saastamoinen; Kati Pajunen

Addresses: Department of Business, University of Eastern Finland, Joensuu Campus, Yliopistonkatu 2 P.O. Box 111, Joensuu FI-81101, Finland ' Department of Business, University of Eastern Finland, Joensuu Campus, Yliopistonkatu 2 P.O. Box 111, Joensuu FI-81101, Finland

Abstract: IAS 36 provides latitude to management in the impairment testing of goodwill assets, which may intensify agency conflict. In this study, we carry out an empirical analysis on goodwill impairment losses recognised by Finnish listed companies between 2005 and 2009. We document evidence that a change of CEO is associated with a goodwill write-off. Further, our results indicate that the size of a goodwill impairment loss is larger when the company's reported earnings would have been negative in the absence of the impairment charge, which points towards behaviour associated with earnings bath. However, we also report evidence that the monitoring function of the stock market may reduce asymmetric information concerning the carrying value of goodwill. These results suggest that regulators could benefit from focusing on monitoring compliance with the current goodwill accounting standards in firms which exhibit high levels of information asymmetry between investors and management.

Keywords: earnings bath; goodwill impairment testing; IAS 36; In­ter­na­tional Ac­count­ing Stand­ards; managerial discretion; market monitoring; management discretion; stock markets; Finland; goodwill assets; agency conflict; asymmetric information; compliance monitoring.

DOI: 10.1504/IJMFA.2016.077956

International Journal of Managerial and Financial Accounting, 2016 Vol.8 No.2, pp.172 - 195

Available online: 23 Jul 2016 *

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