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Evidence on the use of unverifiable estimates in required goodwill impairment

Author

Listed:
  • Karthik Ramanna

    (Harvard Business School, Accounting and Management Unit)

  • 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 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). Thus, agency theory predicts managers will, on average, use the 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 derived predictions, does not confirm the private information hypothesis.

Suggested Citation

  • Karthik Ramanna & Ross L. Watts, 2009. "Evidence on the use of unverifiable estimates in required goodwill impairment," Harvard Business School Working Papers 09-106, Harvard Business School, revised Mar 2011.
    • Handle: RePEc:hbs:wpaper:09-106
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    Cited by:

    1. Demerjian, Peter R., 2011. "Accounting standards and debt covenants: Has the “balance sheet approach” led to a decline in the use of balance sheet covenants?," Journal of Accounting and Economics, Elsevier, vol. 52(2), pages 178-202.
    2. Ajina, Aymen & Laouiti, Mhamed & Msolli, Badreddine, 2016. "Guiding through the Fog: Does annual report readability reveal earnings management?," Research in International Business and Finance, Elsevier, vol. 38(C), pages 509-516.
    3. Henry Jarva, 2014. "Economic consequences of SFAS 142 goodwill write-offs," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 54(1), pages 211-235, March.

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