Do financial analysts compel firms to make accounting decisions?: Evidence from goodwill impairments

• In Event: Financial Analysts: Information Provision and Interpretation

Abstract

This paper examines whether financial analysts’ presence compels managers to make accounting decisions. Specifically, we examine whether the presence of financial analysts impacts a manager’s decision to recognize a goodwill impairment. Analysts should impact managers’ impairment decisions in at least two ways: (1) by improving the information environment through an independent analysis of firm performance (i.e., an “ex ante” monitoring), and (2) by increasing the likelihood that investors understand when managers fail to record a necessary impairment (i.e., an “ex post” monitoring). Consistent with these expectations, we find that the likelihood of an impairment is more strongly related to impairments when analyst coverage is higher. We also find that the effects of analyst following are strongest when analyst effectiveness (i.e., experience, tenure) is greater and when firm uncertainty (i.e., forecast dispersion) is lower. Finally, we find that investors react negatively to impairment announcements when analyst following is high, suggesting that these impairments convey new information and thus result in more timely impairment recognition. Overall, our results support the notion that analyst monitoring compels managers to make goodwill impairments.

Authors

• Douglas Ayres

• John L. Campbell, University of Georgia

• James A Chyz, University of Tennessee-Knoxville

• Jonathan Shipman, University of Arkansas-Fayetteville