Do Financial Analysts Compel Firms to Make Accounting Decisions? Evidence from Goodwill Impairments
Review of Accounting Studies, Forthcoming
49 Pages Posted: 7 Sep 2015 Last revised: 12 Aug 2019
Date Written: August 12, 2019
This paper examines whether financial analysts’ presence compels managers to recognize a goodwill impairment. Analysts could impact managers’ impairment decisions in at least two ways: (1) by improving the information environment through an independent analysis of firm performance (i.e., an “ex ante” monitoring), and (2) by increasing the likelihood that the manager and the firm experience negative consequences when they fail to record a necessary impairment (i.e., an “ex post” monitoring). We find that the likelihood of a goodwill impairment is more strongly related to an expected impairment when analyst coverage is higher. Consistent with both “ex-ante” and “ex-post” monitoring, we also find that analyst downgrades prior to the firm’s reporting date increase the probability that management records an expected goodwill impairment at the reporting date and that failing to record an expected impairment is associated with decreases in analyst following and a lower likelihood that managers are employed at the end of the following year. Our results are stronger when a firm’s analysts are of higher quality and when they are in greater agreement. Overall, our results imply that analysts’ presence compels managers to make goodwill impairments and provide evidence of the mechanisms by which they do so.
Keywords: Financial analysts; Goodwill impairment; Accounting choice; Disclosure costs
JEL Classification: M41, G32, D81
Suggested Citation: Suggested Citation