Goodwill impairment charges under SFAS 142: role of executives' incentives and corporate governance
MetadataShow full item record
This study examines factors that influence managers’ choice to recognize goodwill impairment under Statement of Financial Accounting Standards No. 142 (SFAS 142). The debate surrounding SFAS 142’s effectiveness centered on whether the managerial discretion allowed by the standard could lead to biased decisions in managers’ determination of goodwill impairment. I use a conditional logistic regression to compare 130 firms that did recognize the existing impairment losses (write-off firms) to a control sample of 130 matching firms that did not recognize the existing impairment losses (no write-off firms). I find that the likelihood of recognizing the existing impairment losses significantly decreases when the managers have sizable holdings of in-the-money stock options. On the other hand, the likelihood of recognizing the existing impairment losses significantly increases when firms have stronger corporate governance, as measured by percentage of outside directors, percentage of outside directors’ ownership, number of busy directors, and separation of CEO and Chair titles. Additionally, I find that during the period leading up to the SFAS 142 write-off, there have been more favorable changes in corporate governance structures of the writeoff firms, compared to that of no write-off firms. These favorable changes in governance structures occurred to a greater extent in firms that have delayed the recognition of existing impairment losses to the sample period compared to the firms that have been recognizing the write-offs on a timely basis. These results are consistent with the notion that favorable changes in corporate governance induce firms to take SFAS 142 impairment losses, which managers have avoided taking in the prior period. Overall, the results imply that managerial incentives do affect the implementation of standards that expand managerial discretion and highlight the importance of corporate boards in the monitoring of discretion allowed by such standards.
Guler, Lale (2007). Goodwill impairment charges under SFAS 142: role of executives' incentives and corporate governance. Doctoral dissertation, Texas A&M University. Available electronically from