Credibility of Managers’ Fair Value Assessments: Evidence from Smaller-than-Expected Goodwill Impairments

47 Pages Posted: 6 Apr 2021 Last revised: 23 Jul 2021

See all articles by Henry Laurion

Henry Laurion

University of Colorado at Boulder - Department of Accounting

Scott Robinson

University of Colorado Boulder, Accounting Department

Frances M. Tice

University of Colorado at Boulder - Department of Accounting

Date Written: July 22, 2021

Abstract

Goodwill impairment rules compel managers to convey their fair value assessments to investors. Several academic studies conclude that managers, on average, take advantage of discretion under these rules to opportunistically avoid or recognize smaller-than-expected goodwill impairments. We re-examine this conclusion and deliver three main findings. First, 44 percent of firms that avoid or record smaller-than-expected goodwill impairments are justified in doing so based on future stock price recovery. Second, the credibility of managers’ optimistic fair value assessments is positively associated with fundamental firm performance and strong external monitoring. Finally, a trading strategy long in firms that record smaller-than-expected impairments earns excess returns, suggesting that investors do not fully appreciate the signal embedded in these accounting decisions. We conclude that positive private information can be conveyed through smaller-than-expected goodwill impairments.

Keywords: Goodwill Impairments, Manager Credibility

JEL Classification: C23, D22, G32, M21, M41

Suggested Citation

Laurion, Henry and Robinson, Scott and Tice, Frances M., Credibility of Managers’ Fair Value Assessments: Evidence from Smaller-than-Expected Goodwill Impairments (July 22, 2021). Available at SSRN: https://ssrn.com/abstract=3817765 or http://dx.doi.org/10.2139/ssrn.3817765

Henry Laurion (Contact Author)

University of Colorado at Boulder - Department of Accounting ( email )

419 UCB
Boulder, CO 80309-0419
United States

Scott Robinson

University of Colorado Boulder, Accounting Department ( email )

419 UCB
Boulder, CO 80309-0419
United States

Frances M. Tice

University of Colorado at Boulder - Department of Accounting ( email )

419 UCB
Boulder, CO 80309-0419
United States

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