Does writing down goodwill imperil a CEO’s job? |
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Institution: | 1. IESE Business School, Camino del Cerro del Águila, 3, 28023 Madrid, Spain;2. LeBow College of Business, Drexel University, Philadelphia, PA 19104, United States;1. Emeritus Professor, The University of Akron, United States;2. Department of Accounting & Finance, Coggin College of Business, University of North Florida, United States;1. Lingnan University, Hong Kong;2. The Hong Kong Polytechnic University, Hong Kong |
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Abstract: | We find that accounting charges for goodwill impairment, which imply a deterioration in the capabilities of acquired assets to generate expected cash flows, provide useful indicators of CEO underperformance. The results show that the size and presence of a goodwill impairment charge are positively associated with forced, but not voluntary, CEO turnovers. This implies that goodwill impairment provides information before CEO changes occur. We also find that goodwill impairment has incremental power to predict forced turnover when it is unexpected based on book value relative to market value of equity and when it runs counter to overall firm performance. The association between goodwill impairment and forced CEO turnover varies with audit quality, consistent with the importance of the perceived reliability of accounting information for its effect on CEO retention decisions. Given that the FASB recently considered eliminating annual goodwill impairment testing (FASB, 2022) whereas the IASB not only prefers impairment testing but is considering requiring additional related disclosures (IASB, 2020), our evidence on the informativeness of goodwill impairment charges is timely. |
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Keywords: | Goodwill impairment CEO turnover Mergers and acquisitions |
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