Acquirers’ Use of Fairness Opinions and Subsequent Goodwill Impairments

Abstract

In this study, we examine the association between acquirers’ use of fairness opinions and subsequent goodwill impairment charges. Understanding both fairness opinions and goodwill impairments are of interest to investors, analysts, auditors, and regulators. Using a large sample of manually collected data, we find that when an acquirer purchases a fairness opinion, goodwill is more likely to be impaired and to be impaired with a greater amount, suggesting that acquirers purchase fairness opinions to justify overpayment and provide legal protection. Additionally, for acquirers with fairness opinions, we find some evidence that acquirers that purchase multiple fairness opinions and opinions from top financial advisors and advisors with smaller contingent fees are less likely to impair their goodwill and impair with a smaller amount. Our results are robust after controlling for endogeneity and using hazard model. Overall, we identify the existence of fairness opinions and opinion-related characteristics as an oversight mechanism that is associated with subsequent goodwill impairments.