Goodwill Accounting and Asymmetric Timeliness of Earnings

34 Pages Posted: 17 Oct 2012

See all articles by Sohyung Kim

Sohyung Kim

Brock University - Faculty of Business

Cheol Lee

Wayne State University

Sung Wook Yoon

California State University, Northridge

Date Written: June 15, 2012

Abstract

This paper investigates how fair value reporting and increased managerial discretion under the new goodwill accounting affect the asymmetric timeliness of earnings; i.e., accounting conservatism. We adopt Kahn and Watts’ (2009) C_Score, a firm-year measure of Basu (1997) conservatism, to capture a cross-sectional variation in asymmetric timeliness of earnings. We find that financial reporting for firms with purchased goodwill has become more conservative after the enactment of the new standard. However, once we control for an increase in conservatism that is not attributable to new goodwill accounting, we find that accounting earnings for firms with purchased goodwill become less conservative. Our results support Watts’ (2003a) assertion that new goodwill accounting impairs accounting earnings’ ability to reflect the economic earnings in a timely manner, but these results should be interpreted with caution, as the main objective of goodwill accounting is not to improve accounting conservatism.

Suggested Citation

Kim, Sohyung and Lee, Cheol and Yoon, Sung Wook, Goodwill Accounting and Asymmetric Timeliness of Earnings (June 15, 2012). CAAA Annual Conference 2013. Available at SSRN: https://ssrn.com/abstract=2161980 or http://dx.doi.org/10.2139/ssrn.2161980

Sohyung Kim

Brock University - Faculty of Business ( email )

St. Catharines, Ontario L2S 3A1
Canada

Cheol Lee (Contact Author)

Wayne State University ( email )

United States
313-577-2242 (Phone)

Sung Wook Yoon

California State University, Northridge ( email )

David Nazarian College of Business & Economics
18111 Nordhoff Street
Northridge, CA 91330
United States
818-677-2428 (Phone)

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