Do Financial Analysts Reduce the Costs of Accounting Decisions? Evidence from Goodwill Impairments

• In Event: DSFI no. 1

Abstract

This paper examines whether financial analysts’ reduce the costs of managers accounting decisions. We examine whether the presence of financial analysts impacts a manager’s decision to recognize a goodwill impairment. Analysts can help investors process the lack of
information in expected impairments, thus diminishing any negative signals sent by impairment recognition. We find that the likelihood of an impairment is more strongly related to expected impairments when analyst coverage is higher. This is consistent with managers expecting the short-term capital market costs of booking an impairment to decrease in analyst following. Consistent with a reduction in the cost of the impairment accounting decision, we find no market reaction around impairment announcements when firms have high analyst following. In contrast, we find a negative market reaction around impairment announcements when firms have low
analyst following that subsequently reverses within the next 60 trading days. Finally, we find that the effects of analyst following are strongest when investor attention is high and, ceteris paribus,
the potential cost of recording the impairment is greatest. Overall, our results support the notion that analysts can reduce the cost of manager accounting decisions.

Authors

• Douglas Ayres

• John L. Campbell, University of Georgia

• James A Chyz, University of Tennessee-Knoxville

• Jonathan Shipman, University of Arkansas-Fayetteville