Evidence on the Effects of Unverifiable Fair-Value Accounting

60 Pages Posted: 8 Sep 2007  

Karthik Ramanna

Harvard University - Harvard Business School; University of Oxford - Blavatnik School of Government

Ross L. Watts

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: August 31, 2007

Abstract

SFAS 142 requires firms to use fair-value estimates to determine goodwill impairments. Watts (2003) and Ramanna (2007) argue the unverifiable nature of those fair-value estimates gives firms discretion to manage impairments. We test this argument in a sample of firms with market indications of impairment (firms with book goodwill and market-to-book ratio below one). We find that the frequency of non-impairment in this sample is about 71%, and that non-impairment is increasing in financial characteristics predicted to be associated with greater unverifiable fair-value-based discretion. To investigate whether non-impairment is associated with managers producing on average better estimates of goodwill than the market, we test whether non-impairment increases in industries with higher average information asymmetries. We fail to find evidence consistent with this proposition.

Keywords: goodwill impairment, fair-value accounting, SFAS 142

JEL Classification: M41, M43, M44, G38, K22

Suggested Citation

Ramanna, Karthik and Watts, Ross L., Evidence on the Effects of Unverifiable Fair-Value Accounting (August 31, 2007). Harvard Business School Working Paper No. 08-014. Available at SSRN: https://ssrn.com/abstract=1012139 or http://dx.doi.org/10.2139/ssrn.1012139

Karthik Ramanna (Contact Author)

Harvard University - Harvard Business School ( email )

Boston, MA 02163
United States

University of Oxford - Blavatnik School of Government ( email )

10 Merton St
Oxford, Oxfordshire OX1 4JJ
United Kingdom

Ross L. Watts

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

E52-325
Cambridge, MA 02142
United States

Paper statistics

Downloads
2,127
Rank
4,886
Abstract Views
8,129