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.
International Journal of Managerial and Financial Accounting, 2016 Vol.8 No.2, pp.172 - 195
Available online: 23 Jul 2016 *Full-text access for editors Access for subscribers Purchase this article Comment on this article