Economic Consequences of SFAS 142 Goodwill Write-Offs

Abstract

This paper examines the economic consequences of goodwill write-offs under Statement of Financial Accounting Standards No. 142 (SFAS 142). Although write-off firms have performed poorly, it is evident that deteriorating economic performance explains only a small proportion of write-offs. After controlling for endogeneity of write-off choice, I fail to find evidence that investors and analysts fixate on SFAS 142 goodwill write-offs. I also provide evidence that write-off firms pay higher audit fees, suggesting that auditors charge higher fees in response to extra audit effort. These results are consistent with the principles of market efficiency, analyst-forecast rationality, and efficient audit pricing.

Keywords: Audit fees, Conditional conservatism, Fair value accounting, Market efficiency, Propensity score matching

JEL Classification: G14, M41, M48