Does Writing Down Goodwill Imperil a CEO’s Job?

Abstract

We find that accounting charges for goodwill impairment, which imply a deterioration in the capabilities of acquired assets to generate expected cash flows, provide useful indicators of CEO underperformance. We examine 5,990 firms that completed acquisitions and investigate the relation between CEO turnover and goodwill impairment during 2002–2016. The results show that the size and presence of a goodwill impairment charge are positively associated with forced, but not voluntary, CEO turnovers. This implies that goodwill impairment provides information before CEO changes occur. We also find that goodwill impairment has incremental power to predict forced turnover when it is unexpected based on book value relative to market value of equity and when it runs counter to overall firm performance. The association between goodwill impairment and forced CEO turnover varies with audit quality, consistent with the importance of the perceived reliability of accounting information for its effect on CEO retention decisions. Given that the FASB may eliminate annual goodwill impairment testing (FASB, 2019a), research addressing the informativeness of goodwill impairment charges is timely.

Keywords: Goodwill impairment, CEO turnover, mergers and acquisitions

JEL Classification: G32, G34, M41