Goodwill Valuations Certified by Independent Experts: Bigger and Cleaner Impairments?

Abstract

If firms disclose the use of independent valuation experts to assess the magnitude of goodwill impairments, should investors rationally condition their values on that disclosure? This research shows that firms that disclose the use of an independent valuation expert are more likely to report a higher impairment charge in an impairment year but, critically, after controlling for other determinants, the disclosing firms are less likely to have impairments in following years. Thus, when the use of an independent expert is disclosed, while it is rational for investors to downgrade firm value on the basis of the disclosed (higher) impairment charge in that year, there is simultaneously a reduced need to add an additional discount to anticipate further (strategically) delayed impairment charges. The investors need to consider the likely multi‐period time series properties of impairments, and firms may benefit from using an expert if in anticipation of future related impairments, investors significantly reduce the discount applied.

Keywords: certification, goodwill, impairment testing, intangible assets, SFAS 142, valuation experts

JEL Classification: G32, M41