Admitting Defeat in the Presence of Watchdogs: Does External Monitoring Affect the Goodwill Impairment Decision?

• In Event: Financial Accounting and Reporting II

Abstract

This paper explores how the presence of external monitors (i.e. sell side financial analysts and institutional investors) reduces information asymmetry and thus managerial discretion in the goodwill impairment decision. Using both the occurrence of a goodwill impairment and the magnitude of impairment as dependent variable measures, we find that a firm’s contemporaneous market valuation becomes more influential to the impairment decision as the level of external monitoring increases. Our results are robust to the use of firm-level fixed effects and instrumental variables techniques to control for potential endogeneity. We also find these external monitors appear to have a synergistic effect with one another in this setting. Furthermore, we find that the effect of financial analysts becomes less pronounced as the level of dispersion in analyst forecasts rises. Finally, we find that the effect of institutional ownership in this setting becomes more muted as institutional ownership concentration increases.

Authors

• Douglas Ayres, University of Tennessee-Knoxville

• Jonathan Shipman, University of Tennessee