Goodwill Accounting and Asymmetric Timeliness of Earnings

Abstract

This paper investigates how fair value reporting and increased managerial discretion under the new goodwill accounting affect the asymmetric timeliness of earnings; i.e., accounting conservatism. We adopt Kahn and Watts’ (2009) C_Score, a firm-year measure of Basu (1997) conservatism, to capture a cross-sectional variation in asymmetric timeliness of earnings. We find that financial reporting for firms with purchased goodwill has become more conservative after the enactment of the new standard. However, once we control for an increase in conservatism that is not attributable to new goodwill accounting, we find that accounting earnings for firms with purchased goodwill become less conservative. Our results support Watts’ (2003a) assertion that new goodwill accounting impairs accounting earnings’ ability to reflect the economic earnings in a timely manner, but these results should be interpreted with caution, as the main objective of goodwill accounting is not to improve accounting conservatism.