Do Managers Benefit from Delayed Goodwill Impairments?

Abstract:     
Prior research provides evidence that managers delay the reporting of goodwill impairments. This study builds on this evidence by investigating whether managers use their private information regarding goodwill impairments to profit from trading in their own firms’ shares. We find evidence of abnormal selling of shares by corporate insiders in the two years preceding formal announcement of goodwill impairments. In addition, we find that managers’ selling activity is positively associated with subsequent stock price declines. We find similar evidence using a sample of firms where price discovery occurs relatively close to impairment announcements, suggesting that our findings are not attributable to insider trading on general pessimism or other negative news unrelated to reported goodwill impairments. Overall, these findings provide evidence that managers benefit from delayed goodwill impairments, and confirm long-standing concerns by the SEC regarding significant information asymmetries between managers and firm outsiders regarding goodwill impairments.

Number of Pages in PDF File: 34

Keywords: goodwill, impairment, agency cost, insider trading, SFAS 142

JEL Classification: M41

working papers series