Goodwill Impairment Losses and CEO Compensation

• In Event: Financial Accounting and Reporting 4

Abstract

Prior research documents that executives receive large bonuses for completing M&A deals; yet many acquisitions do not create value for shareholders. We examine whether CEO compensation is reduced when the fair value of the acquired business units are written down (i.e. goodwill impairment losses are recognized). We find that there is a significant reduction in cash-based and option-based CEO-compensation as firms recognize goodwill impairment losses. We further document that, on average, various components of CEOs’ compensation packages are downward-adjusted following the recognition of goodwill impairment charges when CEOs are in the early stage of their tenure, their firms have spent more for their targets, and their firms are not R&D intensive. Our results suggest that compensation committees make CEOs pay a price for non-value maximizing acquisitions and discourage them from further undertaking risky investments especially by reducing the risk-inducing component of their compensation packages.

Authors

• Masako Darrough, Baruch College, CUNY

• Lale Guler, Koc Universitesi

• Ping Wang, Pace University