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Evidence on the use of unverifiable estimates in required goodwill impairment

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Listed:
  • Karthik Ramanna

    (Harvard Business School)

  • Ross L. Watts

    (MIT Sloan School of Management)

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 that 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). Agency theory predicts managers will, on average, use the unverifiable 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 based predictions, does not confirm the private information hypothesis.

Suggested Citation

  • Karthik Ramanna & Ross L. Watts, 2012. "Evidence on the use of unverifiable estimates in required goodwill impairment," Review of Accounting Studies, Springer, vol. 17(4), pages 749-780, December.
    • Handle: RePEc:spr:reaccs:v:17:y:2012:i:4:d:10.1007_s11142-012-9188-5
    DOI: 10.1007/s11142-012-9188-5
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    Keywords

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    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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