Role of Financial Reporting and Auditing in Disciplining CEOs: Evidence from Goodwill Impairments

59 Pages Posted: 18 Jun 2019 Last revised: 26 Jun 2019

See all articles by Al (Aloke) Ghosh

Al (Aloke) Ghosh

UNC Charlotte

Armen Hovakimian

Baruch College - Zicklin School of Business

Huajing Hu

Adelphi University

Date Written: June 9, 2019

Abstract

According to accounting and auditing standards, external auditors and management must both independently monitor goodwill balance for any impairment. Therefore, goodwill impairment may contain valuable incremental information about the CEO’s ability which the board can utilize for CEO retention decisions. Consistent with this expectation, we find goodwill impairments lead to a large jump in subsequent CEO turnover. The turnover-impairment relationship varies with CEO power, auditor quality, accounting performance, and CEO-age and the information in goodwill impairment is incremental to the announcement period stock returns. Our analyses suggest that boards utilize the negative information in goodwill impairment in one of two ways. In the more severe cases, the incumbent CEO is dismissed; in other cases, their equity compensation is reduced which suggests that retention and pay act as alternative disciplining mechanisms. Our study highlights how the intersection of financial reporting and auditing can generate valuable information in disciplining CEOs.

Keywords: ceo turnover, acquisitions, goodwill impairment

JEL Classification: G30, G32, G34

Suggested Citation

Ghosh, Al (Aloke) and Hovakimian, Armen and Hu, Huajing, Role of Financial Reporting and Auditing in Disciplining CEOs: Evidence from Goodwill Impairments (June 9, 2019). Baruch College Zicklin School of Business Research Paper No. 2019-06-03. Available at SSRN: https://ssrn.com/abstract=3401538 or http://dx.doi.org/10.2139/ssrn.3401538

Al (Aloke) Ghosh (Contact Author)

UNC Charlotte ( email )

9201 University City Blvd
Charlotte, NC 28223
United States

HOME PAGE: http://www.alokeghosh.com

Armen Hovakimian

Baruch College - Zicklin School of Business ( email )

One Bernard Baruch Way
Box B10-225
New York, NY 10010
United States
646-312-3490 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://zicklin.baruch.cuny.edu/faculty-profile/armen-hovakimian/

Huajing Hu

Adelphi University ( email )

1 South Ave
Garden City, NY NY 11530
United States

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