Managerial Motivation for Claiming a Goodwill Impairment Loss During a Period of Economic Prosperity

Abstract

This study examines the link between goodwill impairment losses and firms’ relative economic performance during a period of economic prosperity. Results from the academic literature stream support both the informative and uninformative aspects of goodwill accounting. From the informative perspective, goodwill impairment losses improve earnings’ predictability of cash flows and stock returns. From the uninformative side, goodwill impairment losses have been linked to opportunistic management behavior. Thus, gaps exist in the literature stream pertaining to the timing and managerial motivation for claiming goodwill impairment losses. Our study fills a gap in the literature by examining firms’ goodwill impairment loss write-offs during a particular period, specifically the year of 2006, a period of economic prosperity. By examining the association of firms’ goodwill impairment loss write-offs during this period with both economic performance and accounting indicator variables, managerial motivation for claiming goodwill impairment losses becomes clearer. We find economic performance indicators do not support firms’ goodwill impairment loss write-offs. Further, accounting indicator variables are associated with firms’ goodwill impairment loss write-offs. Also, goodwill impairment losses provide a marginal increase in the explanatory power of operating earnings as a predictor of the following period’s operating cash flows. These results do not support the informative role of goodwill accounting. Rather, firms manage their goodwill impairment loss write-offs in conjunction with other accruals within a much broader earnings management strategy. Our study extends prior research related to firms’ contracting incentives with respect to goodwill impairment loss write-offs.